RBI Governor Against Artificial Fixing Of Bad Debts

Financial Express-06 April 2014

Raghuram Rajan's hard talk to banks: Stop looking for artificial fixes on bad loans-

RBI governor Raghuram Rajan on Friday asked banks to stop looking for ‘artificial fixes’ in dealing with bad loans and make efforts to ‘fix things up the right way’.

Postponing recognition is not forbearance, he said, referring to banks that had approached RBI to consider treating bad loans with forbearance and postpone recognising these as bad loans.

Rajan said the focus must be on treating performing assets. “I think when we do that, we clean up our balance sheets; the markets will (then) be willing to provide finance to institutions that had these balance sheets and, thereby, create a space in financing. So, let’s not try to find artificial fixes. Let’s go about fixing it the right way,” he said.

“Because I am not telling our banker friends who are working very hard at this point to deal with some of these problems and put the banks back on track. I think the time will tell what distinguishes the men from the boys and women from the girls and the truly good bankers will figure out ways to put their balance sheets back on track, put their banks back on track.”

He said it was a shame that so many people in the country did not have access to banking. “There has to be a way around this. We have to give people good savings products, We have to give people good investment products. Looking inwards, we have to look at what regulations make sense and what don’t make sense,” he said.

RBI flags rising risks for banks from bad loans, stressed corporates

 
BL ;MUMBAI,JAN 1,2014: 

Financial Stability Report warns of cascading effect of default

 

Banks are more at risk now than six months ago with a jump in bad loans and a rise in the number of loans restructured by stressed companies.

According to the Reserve Bank of India’s latest Financial Stability Report, the inter-linkages among banks heighten the risk in case even one large corporate falters in keeping up with the debt repayment schedule.

“The Banking Stability Index (BSI), which measures the expected number of banks that could become distressed given that at least one bank becomes distressed, has risen sharply since August 2013,” the report said. It did not, however, mention the number of banks that would be affected.

In his introduction to the report, RBI Governor Raghuram Rajan said that the stress test assumes extreme conditions but shows that the financial system in India is resilient to pressures at this point in time but there is a need to be vigilant.

Contagion problem

The report said that a large loss caused by a corporate to a bank may not be restricted to that lender alone. It can distress the entire system. “If, in the case of one or more banks, the loss is large enough to cause distress to the bank, there will be further losses (to the entire banking system) due to the contagion caused by the distressed bank,” the report warned.

For instance, if the bad loans double for a large bank, the additional losses to the banking system would increase by 26.8 per cent of the total capital. The RBI also admitted that part of the problem was banks’ large exposures to big corporates.

“In the Indian context, a bank’s exposure to a single borrower can go up to 25 per cent of the bank’s total capital, while its group exposure limit can go up to 55 per cent of the bank’s total capital. These exposure norms have evolved in the context of the country’s growth and development requirements, but are on the higher side by international standards,” cautioned the report.

The RBI said five sectors — infrastructure, iron and steel, textiles, aviation and mining — account for about 24 per cent of the total advances of Scheduled Commercial Banks, and account for around 51 per cent of their total stressed advances.

On the broader economy, the RBI Governor said that the outlook had improved, with exports gaining momentum. “It is imperative that long-delayed legislative reforms are pushed through, stalled infrastructure project clearances continue and fiscal consolidation remains on track in order to maintain the momentum.”

Broader economy

In the second quarter of the current fiscal, India’s GDP grew 4.8 per cent against 4.4 per cent in the previous quarter. He said high inflation has meant that there is limited room for cutting interest rates to boost growth. In addition to the US Fed’s tapering over the next year, a potential source of uncertainty in India would be the next year’s general elections. “A stable new government would be positive for the economy,” he said.

How to tackle the pile of bad loans

RBI wants banks to act fast and decisively in tackling bad loans. Photo: Pradeep Gaur/ Mint

Tamal Bandyopadhyay :Live mint:22 Dec 2013

One hopes that RBI can break the cosy relationship that bankers and corporate borrowers have developed on treatment of bad loans

Now that the Reserve Bank of India (RBI) is pushing for an early recognition

 of financial distress and prompt steps for resolution and recovery of bad 

assets, will analysts rush to re-rate public sector banks that have the

 highest pile of bad loans? It’s unlikely to happen soon as the proposed 

norms deal with new bad loans and not the stock and do not give any 

handle to bankers to address issues on which they have no control. 

For instance, infrastructure firms that have been badly hit by project delays constitute a large chunk of bad loans. About 215 projects worth Rs.7 trillion have been held up, according to a finance ministry estimate. Indeed the government has initiated steps to speed up the process but progress has been slow. The RBI norms can help bank refrain from restructuring aKingfisher Airlines exposure, but bankers can do little when projects are stuck because of delays in getting clearances from various agencies and loans are turning bad.

RBI wants banks to act fast and decisively in tackling bad loans. It plans to set up a central repository of information on large loans to collect, store and disseminate to date. The repository will have data on all loan accounts worth Rs.5 crore and above. Both banks and large non-banking companies will contribute credit information to the repository. This database will come in handy for the proposed joint lenders’ forum, which RBI wants the banks to set up. The platform will be particularly helpful for multiple banking arrangements. Unlike consortium lending, where all lenders are on the same page, in multiple banking, a rogue borrower can take the lenders for a ride as terms and conditions of different exposures could be different. Another critical aspect of RBI’s discussion paper of bad loan resolution—which will come into effect in January—is the formation of an independent evaluation committee that will vet all loan restricting of Rs.500 crore and above prepared by the corporate debt restructuring (CDR) cell. The India Banks’ Association, a bankers’ lobby, will set up the evaluation committee in consultation with RBI.

Overall, RBI wants to give incentives to banks for their promptness to spot a bad loan and initiate the recovery process fast and penalize them for their callous approach by making them set aside more money to take care of the pile of bad assets. Corporate borrowers will need to have more skin in the game. The victims of a slowing economy will be treated with dignity but wilful defaulters will have no place to hide. Finally, asset reconstruction companies will be encouraged to play a more active role and private equity funds may get an opportunity for leveraged buyouts of stressed assets.

RBI has been progressively tightening the rules for loan recasts to prevent misuse of the facility by companies. For instance, in May, the central bank had said promoters must provide a personal guarantee in all cases of restructuring and a corporate guarantee could not be accepted as a substitute for a personal one. Promoters also had to bring in a minimum of 20% of the loan amount that a bank would forgo in such a recast, or 2% of the total restructured debt, whichever is higher.

For restructured loans on their books in May, banks needed to increase provisions to 3.5% of restructured loan value with effect from 31 March and 4.25% with effect from 31 March 2015. One year after that, effective 31 March 2016, all provisions on restructured loans would increase to 5%. For loans restructured after 1 June, the provision was increased to 5% of the loan amount. The new norms will jack up the provision requirement manifold in cases where banks are found sleeping over their bad loan pile.

The gross bad assets of all listed banks rose close to 37% in the September quarter from a year earlier to Rs.2.29 trillion from Rs.1.67 trillion. Even after setting aside money, their net bad assets were up close to 51%—from Rs.85,000 crore to Rs.1.28 trillion. On top of this, banks have restructured some Rs.2.72 trillion loans through the CDR platform. This, however, does not include those loans that have been restructured bilaterally. The collective amount of such loans could be as much as the loans restructured at the CDR cell. That we have not seen the worst of bad loans as yet is evident from the fact that in October restructuring cases worth Rs.22,000 crore were referred to the CDR forum after Indian banks added an identical amount to the restructured loan pile in the three months ended 30 September. In the June quarter, aboutRs.20,000 crore of loans were recast and in March quarter, another Rs.15,000 crore.

One hopes that RBI is able to break the cosy relationship that bankers and their corporate borrowers have developed over the years on treatment of bad loans and loan recasts, as both sides benefit from such arrangements. While corporations ensure an uninterrupted flow of money, banks manage to make their balance sheets look healthy. On top of this, most government-owned banks lack both credit appraisal and monitoring expertise. Short tenure of the chairmen of state-run banks, which account for about 70% of banking assets in India, also contributes to this. Typically, a chairman with a two-year tenure spends his first year in cleaning up the balance sheet by identifying all bad assets and setting aside money for them, but the second year is spent hiding such assets as every boss wants to retire on a happy note. Unless these issues are addressed, it’s not easy to tackle the menace of bad loans, particularly when the economy is not in the pink of health.

Tamal Bandyopadhyay keeps a close eye on everything banking from his perch as Mint’s deputy managing editor in Mumbai. He is also the author of A Bank for the Buck, a book on HDFC Bank.