Fin Min wants PSU banks to phase out unsecured short-term loans

zee news:PTI :Tuesday, August 21, 2012, 17:36

The government has asked the public sector banks to phase out all short-term loans without collaterals by January end saying these lendings create pressure on balance sheets of banks.

"All such loans shall either be phased out in the next six months time or collateral security will be created," a Finance Ministry communication to heads of all PSBs said.

The PSBs have also been asked to frame a policy for sanctioning short term unsecured loans.

It further said in future, any sanctions without security should have the approval of their Boards as "most of these loans are unsecured and therefore create pressure on PSBs for keeping such account standard".

The Finance Ministry, said in case any such loans have become non-performing assets (NPAs), details of the cases should be provided to it.

The directive applies to loans which are being extended without any security and are of short term in nature.

Since short term loans create pressure on the PSBs, the ministry felt there is a need to reduce this pressure by strengthening the process of sanction of such loans, the communication issued last month said.

The instructions to PSBs comes at a time when NPAs in the state-owned banks are rising due to slowdown in economic activities.

 

Are Indian Banks camouflaging NPAs?

 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.