Reserve Bank of India Deputy Governor R Gandhi on Tuesday asked banks to ensure proper structuring of credit facilities and beef up their credit appraisal skills for managing asset quality. Besides, they should give up the ‘one size fits all’ approach of extending loans to clients.

He also emphasised that loan restructuring should be driven by banks’ motivation to revive an account, rather than merely concentrating on asset classification and provisioning benefits.

“While granting credit facilities, banks should set realistic repayment schedules on the basis of a proper analysis of cash flows of the borrowers.

“This would go a long way in facilitating prompt repayment by the borrowers and thus improve the record of recovery in advances,” said Gandhi at an Asset Reconstruction & Non-Performing Assets Management Summit.

He cautioned that a ‘one size fits all’ approach and providing plain vanilla loans to all clients may not be in the interest of banks as well as its customers.

Considering the effect bad loans have on both capital and liquidity position of banks, Gandhi felt that there is an urgent need for banks to reduce their stressed assets and clean up their balance sheets lest they become a drag on the economy.

Inadequacies in appraisal He underscored that one of the fundamental issues that hampers bad loan management is the inadequacies in the credit appraisal capacity of banks, more specifically on project appraisal.

The Deputy Governor said, “As we know, there is just one technical consultancy firm, besides some specific desks in some banks.”

“With the requirement of independent evaluation for Joint Lenders Forums (JLFs) and the number of JLFs, there is a crying need for emergence of additional technical capabilities to undertake evaluation of projects, restructuring schemes, etc.”

Banks will have to strengthen their in-house desks as well. The RBI through the Centre for Advanced Financial Research and Learning has taken the initiative to organise capacity building programme for bankers.

Consortium members Another suggestion that has come up for bad loans management relates to limiting the number of banks and financial institutions that should be permitted in a consortium or even in a multiple banking arrangement. 

“It is said that the banks with very meagre share (loan exposure in a consortium) neither have incentives nor inclination to independently assess the (loan) proposal and they typically and blindly go by the one that has the bigger share. Even if the bank has in-house technical capabilities, with a small share its voice is not strong enough,” Gandhi said.

Therefore, the suggestion is to have a regulatory limit on the number of members in a consortium or multiple banking arrangements so that every member has at least 10 per cent of the exposure and therefore, will undertake serious independent credit appraisal and credit monitoring.

However, there are counter views about this suggestion, especially with regard to the freedom available to banks and borrowers to take commercial decisions related to loans.

Referring to the sudden drop in the assets being ‘restructured’, the Deputy Governor observed that it seems banks have become very choosy in restructuring loans to borrowers who are under stress. One of the reasons cited for the drop in restructuring of assets is that ‘banks have no incentive in restructuring’.

“We feel that the decision of banks in restructuring should be driven by their motivation to revive an account which is under temporary financial difficulty and preservation of the economic value of viable entities in the interest of both the creditors and the borrowers, rather than merely concentrating on asset classification and provisioning benefits,” explained Gandhi.

Reconstruction companies On the recovery side, Gandhi said the performance of ARCs is not very encouraging. As on March 31, 2015, the average recovery rate (assets resolved as a percentage to assets acquired) of ARCs was 31 per cent.

One of the reasons for the dip in the average recovery rate is the fact that a substantial part of the assets under management of ARCs is acquired recently.

Further, wide variation in recovery rates among ARCs has also been observed for the same reason.

Only a few of the 15 ARCs appear to have been successful in acquiring assets from banks. Of the 15 registered ARCs, the top three (ARCIL, JM Financial and Edelweiss) account for more than two-thirds of the total assets of all ARCs.

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