Raghuram Rajan has made a clean-up of the increasing pile of bad loans in India’sRs.84 trillion banking industry a top priority since he took charge as RBI governor in September. Photo: Ramesh Pathania/Mint
Live Mint Joel Rebello | Dinesh Unnikrishnan APR 04 2014. 02 06 PM
RBI governor tells bankers to avoid postponing recognition
of bad debt, focus on putting assets back on track
Pune/Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan on Friday warned bankers to avoid ducking a clean-up of their books by delaying the classification of assets that have turned sour as bad loans.
“At the Reserve Bank, corporations and banks come to us saying: ‘Give us some forbearance. Don’t call our loans bad even if it has not been paid for three years. Allow us to postpone recognition.’ This is a wrong way to go about it,” he said.
Forbearance in this case refers to regulatory leniency in allowing banks to treat bad loans as standard assets so that banks need not make provisions to cover the risk of default.
“Postponing recognition will not help,” Rajan said at the annual convocation of the National Institute of Bank Management in Pune. “If it is not paid today, it won’t (be) tomorrow. Focus on putting the asset back on track.”
Rajan, 51, has made a clean-up of the increasing pile of bad loans in India’sRs.84 trillion banking industry a top priority since he took charge as RBI governor in September.
The weakest economic growth in a decade, high interest rates, slowing demand and delayed project approvals have hurt the ability of many corporate borrowers to repay debt. Growth slowed to 4.5% in the year ended 31 March 2013. In the fiscal year just gone by, growth is estimated by RBI at less than 5%.
In an October interview, Rajan stressed that company promoters and their creditors must share the pain of restructuring impaired assets.
“We have situations where groups are sitting on plenty of money, but that money is not feeding into projects that are in difficulty,” he said then.
Gross non-performing assets of India’s 40 listed banks surged to Rs.2.43 trillion in December, a 36% jump from a year earlier, while restructured loans, at the end of March, rose to an estimated Rs.5-6 trillion.
Together, such loans make up about 12% of total loans given by Indian banks.
RBI rules require banks to set aside money to cover bad loans and restructured loans, hurting their profitability and resulting in the need for higher capital.
Banks need to set aside 5% of the total loan value for a newly restructured loan and anywhere between 10% and 100% of loan value if an asset turns bad.
Speeding up loan recovery will help clean up their books faster, enabling them to finance more projects in the funds-starved infrastructure segment, Rajan said on Friday.
Doing so in times of stress will distinguish “the men from the boys”, he said, implying that only banks with strong risk management systems could effectively manage bad loans in the face of slower economic growth.
“Borrowing at 6% and lending at 8% or 10%, or (making) NIMs (net interest margins) of 3% or 4% is easy,” Rajan said. “But it’s when the bad loans start hitting...you have to rise to the task.”
To tackle the bad loan problem, in January, RBI laid out a road map for early recognition of stressed assets in the banking system.
The framework outlined a corrective action plan that offered incentives for banks identify stressed assets early and revamp accounts considered to be unviable; it imposed accelerated provisioning against sticky assets if banks and companies fail to adhere to the framework.
“There is a tendency that some banks conduct loan restructuring and sell the bad assets to asset reconstruction companies to get rid of the immediate burden,” said Abizer Diwanji, a partner and national leader (financial services) at the Indian unit of audit and consulting firm EY.
“Banks should be more genuine while restructuring assets. Otherwise this can do more harm in the long term, if you are simply passing the buck rather than solving the issue,” said Diwanji.
To increase banking penetration in the country, regulations pertaining to the know-your-customer norms for opening bank accounts need to be reconsidered, if they are hindering the spread of financial services, Rajan said.
On Wednesday, RBI gave in-principle approval to two entities—infrastructure financier IDFC Ltd and micro-lender Bandhan Financial Services Pvt. Ltd—to start new banks as part of an effort to widen the reach of the banking system.
Rajan said the two applicants selected for new banking licences earlier this week were ones that RBI “felt comfortable with”, and the ones that lost out in the race may be better off applying for “differentiated licences”.
The so-called differentiated banks will be specialized institutions such as the payment banks suggested by an RBI panel on financial inclusion, to widen the spread of payment services and deposit products to small businesses and low-income households.
“We have opened up the possibility that applicants can apply again once we put the licences on tap as well as (when) we create differentiated licences. Some of the applicants may be better off applying for a differentiated licence rather than for a full licence,” Rajan said.
A total of 25 entities were in the race, including billionaire Anil Ambani’sReliance Capital Ltd, the Aditya Birla Financial Services Group and L&T Finance Holdings Ltd, an arm of engineering and construction companyLarsen and Toubro Ltd.
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