The Hindu Business Line : Sticky loan swapping under lens

WITH the Reserve Bank of India getting wise to ever-greening of non-performing accounts by banks, some of the banks have switched to swapping sticky accounts. An official confirmation is available with the Government admitting in the Rajya Sabha that such practices are on.

The Government in its reply says: "Based on market intelligence reports in 2003 that certain banks have adopted the undesirable practice of swapping of their sticky loans, the RBI has cautioned its inspecting officers in March 2004 to look out for this practice during the annual financial inspection cycle of 2004-05."

Earlier, banks would place fresh funds in the hands of defaulting borrowers to keep their accounts as standard assets in their books. That helped reduce provisioning and made the bank look strong, though in practice it was not so.

Despite the RBI's warning, some banks prefer this route while others are now going for swapping. For instance, take two banks, A and B, with 10 sordid accounts in their books. The two come to an informal agreement whereby A funds the 10 NPA accounts in B and B returns the favour, though the accounts do not shift out the books of the two banks.

The 10 NPA accounts pass on the funds given by A to B, cleaning the books of B and the same holds for A. In the process, the two banks, at least nominally, can mark these accounts as standard, reduce provisioning and strengthen the balance sheet.

For the borrowers, it is the best way of defrauding the banking system. No one is sure of the spread of this accounting gimmick though auditors should be aware of it.

FDI in banks

In yet another Rajya Sabha reply, the Government has provided details of foreign direct investment in private banks. They are as follows: ING Vysya Bank - 43.99 per cent is held by Mauritius Holdings and BBL Mauritius Investments (of Bank Brussels Lambert Group); UTI Bank - 14.70 per cent is held by HSBC Asia Pacific Holdings (UK) Ltd of HSBC group; Centurion Bank - 46.53 per cent is held by Bank Muscat, Kephinance Investment Pte Ltd and Sabre Capital Worldwide; HDFC Bank - 13.18 per cent is held by JP Morgan Chase Bank (ADS Depository); ICICI Bank - 20.06 per cent is held by Deutsche Bank Trust Company Americas (ADRs Depository); IndusInd Bank - 31.10 per cent is held by IndusInd International Holdings Ltd; Development Credit Bank - 49 per cent is held by the Aga Khan Fund Ltd for Economic Development; Yes Bank - 45 per cent is held by Rabobank International, CVC International, Russel AIF Capital Inc, and Chrys Capital LLC II.

Going by the RBI's draft proposal on ownership and governance of private sector banks, "no single entity or group of related entities can have shareholding or control, directly or indirectly, in any bank in excess of 10 per cent of the paid-up capital of the private sector bank. Further, the percentage of FDI by single entity or group of related entities may not exceed 10 per cent."

Going by the talk in banking circles, RBI may not materially alter the terms and conditions. Perhaps, it could give some time to the players to reduce their stakes.

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