Reuters:Tuesday :28 Aug 2012
Lenders in India will no longer be able to hide non-performing loans on their balance sheets if proposals over the treatment of restructured assets make it into practice. It’s about time.
‘Evergreening’, where non-performing loans are repeatedly refinanced and extended instead of restructured, has distorted the cost of credit in India for years. The practice has allowed inefficient, unprofitable companies to outlast their economic lives, and prevented the new breed of entrepreneurs from taking over.
In a report by Nirmal Bang Equities, a broking firm says, "Banks have resorted to innovative techniques of effectively restructuring stressed corporate standard loans which are not disclosed as restructured standard loans, but are impaired loans. Such a practice makes their asset quality appear deceptively healthy even though it has deteriorated."
It has also allowed an untold amount of bad debts to pile up in the banking system. Last week’s recommendations show that the Reserve Bank of India is finally running out of patience. It needs banks to clear up these bad loans before they become a systemic problem.
That, however, puts India in a tricky situation. Government-dictated targets – designed to fuel economic growth – are partly to blame for forcing the public sector banks to grow their books too fast in the first place. Now that the country’s economy is slowing, politicians will be pressuring banks to lend more, not less, and any restructuring that puts voters’ jobs at risk is bound to meet heavy resistance.
However unpopular, the RBI’s recommendations are sound. The central bank now needs to ensure they are enforced.
Restructuring India’s underperforming borrowers – many of which are still looked on as national champions – will take time, and the upheaval will be a painful burden for the country’s banks at a time when inflation and slower economic growth are already eroding their margins. But it’s a step in the right direction.
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