Lenders should verify source of equity of big borrowers to prevent default: RBI

By Sangita Mehta, ET Bureau | 16 Nov, 2013, 11.27PM  

A senior Reserve Bank of India (RBI) official asked bankers, which are facing a huge spurt in stress assets, to verify the source of equity of big ticket borrowers from defaulting while urging lenders to be compassionate in dealing with small ticket borrowers. Speaking at Bancon, K C Chakrabarty, deputy governor of the RBI told lenders to do away with the practice of technical write-off only as its creates distortions and directed them to improvecredit appraisal system. 

Addressing a gathering of bankers he said, "You need to verify their source of equity. It may happen that majority of his equity is in form of borrowing. Therefore his first objective will be to divert money and repay that money. If you are financing the equity portion than you are not a bank but venture capital finance company- Venture Capital Bank of India." 

In a lighter vein he said that PSU banks may not find the practice of borrowers borrowing money to finance the equity portion usual since their owners-the government - also borrows money from market to provide them equity support. 

RBI's concern for stress assets particularly for PSU banks, stems from the fact they account for 86% of total gross non performing assets (NPA) even as they have a market share of 75% of total loans. 

Chakrabarty also point out the need for banks should take quick decision and to improve credit appraisal, management and monitoring skills. 

While criticizing the practice of technical write-offs he asked banks to do away with it. "We don't need a management to write-off NPAs. More than rs 1 lakh crore has been write-off. It has created maximum distortion since the process is not uniform across banks." Giving data to justify his stand he said that between 2001 to 2013, banks have reduced NPA to the turn of Rs 4,92,903 crore through recovery, upgradation and write-off. Of this the share of write off is Rs 2,04,012 crore while recovery is Rs 1,77,473 crore. "Share of recovery is low. Majority of the reduction in NPA is due to write-off," he said. 

He also criticized the banking regulator decision to give one time dispensation for restructuring loan in 2008 where banks were allowed to restructure loan from retrospective date. At that time RBI had said that the move was aimed to prevent the financial crises following global meltdown on Indian companies and banks. "From retrospective date we have restructured loans accounts. And that has created a problem." Gross bad loans and restructured standard assets stood at 9.2% as on March 2013 against 5.1% in March 2009. 

He indicated that banks credit administration started to deteriorate since the beginning of 2006-07 just around the time banks NPA came under control. "Banks become complacent and that had been the key reason why banks were not prepared to deal with what happened after global crisis," he said. 

Addressing lenders he said that increasing banks are using restructuring of loan as a tool of NPA management and said there is a need to enforce accountability all levels. "There is no accountability for failure of big loans, no accountability for delayed decision making/non account," he said.

bad loan waivers of corporates far higher than farmers -RBI

Mayur Shetty TNN 17 Nov 2013

Mumbai: Data collected by Reserve Bank of India over a period of one year blows the lid off what goes as loan classification in banks.In a presentation at the annual bankers conference,RBI deputy governor K C Chakrabarty showed how banks have sacrificed over Rs 1 lakh crore by writing off bad loans to corporates,which is much higher than Union finance minister P Chidambarams farm loan waiver in 2008 a move that received flak from the industry.
Under the Debt Waiver and Debt Relief Scheme,2008,the Centre had waived off around Rs 60,000 crore to farmers.

In the past 13 years,banks have written off 1 lakh crore and 95% of these are large loans.Everyone talks of the farm loan write-off,but it is the medium and large enterprises segment that has a 50% share in NPAs, said Chakrabarty.

The deputy governor flayed banks for using technical write-offs to reduce their nonperforming assets (bad loans) over the years.Technical writeoff is a process adopted by banks whereby they take a hit on their profits and stop including the defaulting loan in the list of those from whom repayments are due.It is called a technical write-off because although banks do not show these loans as receivables in their books,they continue to pursue recovery in courts or other forum.
A technical write-off enables banks to claim they do not have any bad loans on their books by fully providing for the loans from their earnings.It also reduces their tax outgo.

Chakrabarty also raised the issue of restructured loans advances where potential defaulters are given more time to repay without being called defaulters.Restructuring of loans with retrospective effect has killed credit quality in banks, he said.He warned banks that the leeway might not be available in future.

We must move away from restructuring,there should not be any category called restructuring.The moment it is restructured,it should be declared as NPA,there should not be any technical write-off be prepared for that,unless you do that you might not be able to get out of the mess, he said.

RBI numbers showed that the banks added Rs 4,94,836 crore to their bad loans between 2007 and 2013.During the same period,they reduced NPAs to the extent of Rs 3,50,332 crore.This was possible because loans worth Rs 1,41,295 crore were written off and another Rs 90,887 crore were upgraded to repaying loans and Rs 1,18,149 crore was recovered from defaulters.According to Chakrabarty,after a technical write-off,there is no incentive to pursue recovery.

Between 2007-13,credit to 10 large corporate groups has more than doubled.We have seen that wherever credit growth has been higher,NPAs are also higher. 

Be stringent in loan appraisals, Chakrabarty tells bankers

 

The Hindu : Mumbai :16 Nov 2013


Lambasting banks for surging non-performing assets (NPAs), Reserve Bank of India Deputy Governor K. C. Chakrabarty, on Saturday, said credit risk management was lagging behind among public sector banks.

“I am more concerned of the future of banks than the banks of the future,” said Dr. Chakrabarty while speaking on ‘Two decades of credit management in banks: looking back and moving ahead’, at the annual banking conference (BANCON) here.

Narrating the steps taken by the central bank over the years to address the issue of NPAs, Dr. Chakrabarty said that “whenever we tightened regulations and prudential norms, the asset quality of banks has improved…relaxation is a wrong approach…prudential norms are not to kill banks but to secure their future.”

The sad part, according to Dr. Chakrabarty, was that these banks on their own never tried to analyse the reasons for the surging NPAs. “Many of them preferred to write-off NPAs, especially large borrowers. But when it comes to small borrowers, they were stringent.”

He dismantled the argument that slow growth in the economy had resulted in mounting NPAs. “Bad assets of banks started going up much before the GDP has come down…the culprit is industry… more powerful is the borrower, banks’ appraisal should be stringent and appraisal should be ownership-neutral.”

The Deputy Governor asked bankers to stop accusing farmers and retail borrowers for the NPA mess, and asked them to change their approach to small borrowers. “Be stringent with big borrowers but be sympathetic with small borrowers.”

Dr. Chakrabarty also advised banks to sanction loans at the bank manager’s level, instead of by the head office. He said that write-off should be done ethically for valid reasons. “To write-off a bad loan, no management is required…and those banks which are able to identify the NPAs quicker, will be able to manage it better.”