India’s central bank will now seek weekly reports on toxic loans from lenders

Cleaning up the mess.
Cleaning up the mess.
Image: Reuters/Danish Siddiqui
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The Reserve Bank of India (RBI) has tightened the leash on banks, and its new norms may force lenders to recognise bad loans sooner than later. This, after some of the country’s largest banks, including the giant State Bank of India, have juggled soured loans in the past, citing technicalities.

In order to make the process of declaring and reporting bad loans more efficient, the RBI has streamlined existing norms into a new framework, a notification on Monday (Feb. 12) said. This is expected to force banks to acknowledge a bad loan almost instantly.

“As soon as there is a default in the borrower entity’s account with any lender, all lenders—singly or jointly—shall initiate steps to cure the default,” the RBI said in the notification.

Norms under which bad loans were being resolved have been discarded. These include the scheme for sustainable structuring of stressed assets, ownership norms on stressed accounts, guidelines on joint lenders’ forum and corrective action plan, and strategic debt restructuring scheme.

Instead, the RBI has decided to rely more on a speedier resolution plan under a stipulated time frame, failing which these borrowers will be sent for liquidation under the Insolvency and Bankruptcy Code (IBC) that came into effect in December 2016.

The new norms also direct banks to disclose large loan defaults on a weekly basis to the RBI credit registry, which can be accessed by all lenders. This will ensure that a borrower’s account is treated as a non-performing asset (NPA) across all banks who have lended to this entity.

With a new resolution mechanism in place, the hope is that there will be no rude shock from gross non-performing assets (GNPA), which are expected to rise from Rs8 lakh crore in March 2017 to Rs9.5 lakh crore in March 2018.

What’s the point?

In the past, too, the RBI has tweaked the bad-loan reporting rules a few times to ensure efficiency. But its efforts have not yielded the expected results as banks continued to under-report NPAs.

Even the country’s biggest lenders, SBI and private player HDFC Bank, have been caught trying to show that the quantum of bad loans was lower than what it actually was. Later, under pressure from the RBI, they were forced to report these divergences, i.e., the difference between the RBI’s assessment of bad loans and the one reported by the bank, in their quarterly results.

In its October-December quarter results, SBI accepted that there was a divergence of Rs23,239 crore in the last financial year. HDFC Bank, lauded for keeping its bad loans under check, also reported a divergence of Rs2,051 crore. Others such as Axis Bank and YES Bank even reported a lower share of bad loans, which they subsequently corrected under the RBI’s pressure.

“There is scope for a better quality of  disclosures as the total quantum (of bad loans) is growing. The problem is that banks play within the rules of the game and they disclose what is minimum required,” said Karthik Srinivasan, an analyst at credit rating firm ICRA.

Specifically, the RBI has mandated banks to report these divergences only if there is a divergence of over 15%. This implies a possibility that the smaller variations remain completely hidden from shareholders.

“There is a thin line between ever-greening of loans and actual restructuring,” said an analyst with a domestic brokerage house, requesting anonymity. The first refers to banks giving a fresh loan to help a borrower repay an old one. “Now, that RBI is taking a closer look at the balance sheet, the skeletons are tumbling out of the closet,” the analyst added.

Some observers are also seeking stricter laws, insisting that the banks’ managements and auditors be taken to task.

“The RBI had asked banks to disclose the divergence with the idea of trying to name and shame the banks. But the problem is that it doesn’t work, because if these bankers were ashamed, they would had resigned or have been fired,” said Hemindra Hazari, an independent banking analyst. “The system as a whole has failed the ordinary shareholders and depositors because they want to maintain the status quo and pretend that this is a one-off case. But we have seen that it is far from true.”