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In the asset quality review of banks’ books that the Reserve Bank of India recently undertook, the apex bank has come across manipulation of drawing power, funding of satellite entities, and round-tripping by borrowers, according to Deputy Governor SS Mundra.
Drawing power (DP), which is arrived at on the basis of the stock and book debts of the borrower, is the extent to which a company can withdraw from its cash credit account. Bankers say borrowers can up their DP by manipulating the stocks.
Borrowers do round-tripping by presenting the same collateral (for example, a diamond company presents the same stock of diamonds at its branches, say, in Mumbai, Dubai and Hong Kong) and gets loans from banks.
At a CII Banking Summit, Mundra also flagged overdrafts being paid by fresh sanctions, sale of assets within groups at inflated prices and conversion of non-fund-based limits to fund-based limits.
The RBI has undertaken the asset quality review in a bid to get banks to clean up their balance sheets.
Mundra said the impaired loans (gross non-performing assets plus restructured assets plus written-off assets) problem was not uniform across the banking sector.
Impaired assets The impaired assets in the case of public sector banks rose to 17 per cent as on September-end 2015 from 16.1 per cent as on March-end 2015. In the case of private sector banks and foreign banks, the impaired assets were at 6.7 per cent (6.7 per cent as on March-end 2015) and 5.8 per cent (6.5 per cent), respectively.
The Deputy Governor said medium and large enterprises accounted for 31.5 per cent and 23.7 per cent, respectively, of total impaired assets in the banking system.
“Contrary to popular perception, stress is relatively much less in priority sector (7.9 per cent),” Mundra said.
He observed that borrowers should “cooperate” with banks in their own long-term interest to put their assets back on track.
In the backdrop of corporate credit slowing down and banks getting aggressive on retail lending, Mundra cautioned about the possibility of adverse selection in the case of the latter.
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