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.