Apr 14 2013 , Mumbai
FinMin, RBI concerned over large loan recasts
The finance ministry has asked banks to go slow on writing off loans. In a recent meeting with bank chiefs, the ministry advised them to write off amounts equivalent to or less than cash recoveries in a particular year.
Certain banks have been writing off loans in excess of their cash recoveries to keep non-performing asset (NPA) portfolio low. The ministry is understood to have advised banks not to favour defaulters.
"The ministry had sought data for seven years to find out the kind of writeoffs banks have been doing. It was found out that mostly stressed assets of large borrowers were being written off, while in certain cases the prudential writeoffs were in excess of cash recoveries,” said a banker, who did not want to be named. His bank too has furnished NPA figures to the ministry.
Another senior banker, who too did not want to be identified, said, “In certain cases, banks were found shielding large borrowers and initiating action against smaller borrowers. Non-performing assets in the banking system has been the focus of the ministry ever since banks began reporting higher defaults.”
Naresh Takkar, managing director of rating agency ICRA, said: “Large leveraging and huge balance sheets are a concern. But not all entities availing of bank loans are over-leveraged. The slowdown in the economy is impacting cash flows of companies; project slowdown is causing cost overruns on all projects; payment cycles are getting elongated; and uncertainties continue to dog companies. Due to the macroeconomic scenario, even where highly-leveraged entities have begun divesting parts of their assets, debt levels are too high for such divestment to achieve substantial improvement in their credit profiles.”
According to ICRA, the credit outlook for metals & mining, construction, power and capital goods sectors will remain negative till such time that policy-related constraints are addressed and there is some meaningful pickup in the investment cycle.”
According to RBI estimates, gross non-performing assets in the Indian banking system are expected to cross 4.2 per cent of the gross bank credit, while restructured assets are expected to cross 5.5 per cent of gross advances by the end of March this year. The consolidated figure of NPAs and restructured assets can be finalised only after all the banks have declared their results.
Large restructuring of loans is also a major concern for the Reserve Bank. To dissuade banks from restructuring accounts that do not merit rescue, RBI has implemented higher provisioning norms from April 1.
Following the recommendation of the B Mahapatra Committee set up to investigate the rising trend of debt recasts, RBI decided to increase provisioning requirement for fresh restructured loans from 2.75 per cent to 5 per cent from April 1 to disincentivise banks from undertaking large restructuring. RBI felt that, in many cases, banks were window dressing books by restructuring loans without justification in order to keep their gross non-performing numbers low.
In addition, for the existing stock of restructured assets, it was decided to increase the provision requirement from 2.75 per cent to 5 per cent in a phased manner, that is, to 3.75 per cent spread over the four quarters of 2013-14, and then, to 5 per cent over the four quarters of the next financial year.
The committee also recommended withdrawal of the regulatory leeway for loan restructuring whereby loans restructured only once were considered standard assets. As the economy is yet to bounce back, the amount of restructured assets has also been increasing, leading to rising bad assets.
manjuab@mydigitalfc.com
Certain banks have been writing off loans in excess of their cash recoveries to keep non-performing asset (NPA) portfolio low. The ministry is understood to have advised banks not to favour defaulters.
"The ministry had sought data for seven years to find out the kind of writeoffs banks have been doing. It was found out that mostly stressed assets of large borrowers were being written off, while in certain cases the prudential writeoffs were in excess of cash recoveries,” said a banker, who did not want to be named. His bank too has furnished NPA figures to the ministry.
Another senior banker, who too did not want to be identified, said, “In certain cases, banks were found shielding large borrowers and initiating action against smaller borrowers. Non-performing assets in the banking system has been the focus of the ministry ever since banks began reporting higher defaults.”
Naresh Takkar, managing director of rating agency ICRA, said: “Large leveraging and huge balance sheets are a concern. But not all entities availing of bank loans are over-leveraged. The slowdown in the economy is impacting cash flows of companies; project slowdown is causing cost overruns on all projects; payment cycles are getting elongated; and uncertainties continue to dog companies. Due to the macroeconomic scenario, even where highly-leveraged entities have begun divesting parts of their assets, debt levels are too high for such divestment to achieve substantial improvement in their credit profiles.”
According to ICRA, the credit outlook for metals & mining, construction, power and capital goods sectors will remain negative till such time that policy-related constraints are addressed and there is some meaningful pickup in the investment cycle.”
According to RBI estimates, gross non-performing assets in the Indian banking system are expected to cross 4.2 per cent of the gross bank credit, while restructured assets are expected to cross 5.5 per cent of gross advances by the end of March this year. The consolidated figure of NPAs and restructured assets can be finalised only after all the banks have declared their results.
Large restructuring of loans is also a major concern for the Reserve Bank. To dissuade banks from restructuring accounts that do not merit rescue, RBI has implemented higher provisioning norms from April 1.
Following the recommendation of the B Mahapatra Committee set up to investigate the rising trend of debt recasts, RBI decided to increase provisioning requirement for fresh restructured loans from 2.75 per cent to 5 per cent from April 1 to disincentivise banks from undertaking large restructuring. RBI felt that, in many cases, banks were window dressing books by restructuring loans without justification in order to keep their gross non-performing numbers low.
In addition, for the existing stock of restructured assets, it was decided to increase the provision requirement from 2.75 per cent to 5 per cent in a phased manner, that is, to 3.75 per cent spread over the four quarters of 2013-14, and then, to 5 per cent over the four quarters of the next financial year.
The committee also recommended withdrawal of the regulatory leeway for loan restructuring whereby loans restructured only once were considered standard assets. As the economy is yet to bounce back, the amount of restructured assets has also been increasing, leading to rising bad assets.
manjuab@mydigitalfc.com
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