A stitch in banking time

Slowdowns are a good time for putting systems in place to ensure that the mistakes of the past aren’t repeated when the next recovery happens. The RBI’s proposed framework to arrest growth in non-performing assets (NPA) of banks, through a mix of recognising distress symptoms early and taking prompt corrective action, is in keeping with this. Gross NPAs of Indian banks amounted to 3.6 per cent of their outstanding advances as on March 31, 2013. If one added loans that were ‘restructured’ – by extending the repayment period, lowering interest rates, waiving part of principal, etc – the total bad debt ratio stood at 9.4 per cent. This figure is bound to rise further by the end of the current fiscal; the last time NPA levels breached single digits was in 2001-02.

The framework now being mooted isn’t going to help bring down the bad loans already in the system as much as making banks more careful while lending in the future. The RBI has proposed that banks shouldn’t wait for loans to turn into NPAs, which happens when interest or principal payments are more than 90 days overdue. Instead, they must monitor accounts much earlier and formulate credit action plans (CAPs) even when the overdue period has crossed 60 days, so that the loans don’t slip into the NPA category. A CAP would initially look at the existing borrower/promoter bringing in additional money or getting in some other investor – in other words, the first step would be to try and turn around the company without any change in the terms and conditions of the loan. Restructuring of the account will be resorted to only if the borrower is not a wilful defaulter and is willing to extend personal guarantees along with declaration of not alienating any assets without the permission of the lenders. Any deviation from this commitment will be reason enough for initiating recovery process. Further, borrowers who frustrate lenders’ resolution efforts will be classified as ‘non-cooperative’. Such borrowers will find it more expensive to access loans in future, as banks would have to make higher provisioning in respect of any exposures to them or to companies where they are promoters/directors.

Such an approach is welcome in an environment in which banks are tardy in going after promoters – including those who run their companies to the ground even as they continue to flaunt lavish lifestyles. In most cases, banks move in late to file winding up petitions or take possession of the defaulting borrower’s assets, by which time they deteriorate in value as well. A good thing is that banks themselves are now beginning to show some spunk – their resisting the beleaguered UB Group’s sale of its holdings in United Spirits to the British liquor giant Diageo without consulting them is a case in point. But they need to do more. The money they lend eventually belongs not to them, but to their depositors.

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