Banks tighten scrutiny on loan recasts
Lenders want forensic audits made compulsory for all proposals on loan restructuring, plan to write to RBI
BY Dinesh Unnikrishnan ----Live Mint
Mumbai/Kolkata: Alarmed at the rising pile of potentially bad assets, banks want to scrutinize all proposals to recast loans more rigorously by making forensic audits mandatory.
Gross bad loans at India’s banks topped Rs.2 trillion in the three months ended 30 September. If a portion of the Rs.2.65 trillion in restructured loans turns bad, the stress in the industry will only increase.
The decision to make forensic audits compulsory was taken at the core group meeting of large banks, which met at the corporate debt restructuring (CDR) cell on 27 September in Mumbai, two bankers familiar with the development said on condition of anonymity.
“An investigative audit of the books of the company seeking CDR is important,” said one of the bankers. “Banks will soon write to RBI (Reserve Bank of India) on this.”
The core group, which meets twice a year, consists of State Bank of India, the nation’s largest lender, ICICI Bank Ltd, Punjab National Bank and Bank of India, among a few others. Changes in the CDR rules can only be made by the banking regulator.
Banks are reeling under the pain of mounting bad loans in a slowing economy that grew 4.4% in the three months to June, the slowest quarterly pace since the first quarter of 2009, after growing 5% in the fiscal year ended 31 March, the slowest in at least a decade.
Gross bad loans and loans under CDR together contribute about 8% of bank lending, a clear indication of the stress in the sector.
A company is usually admitted to the CDR process after a joint lenders’ meeting finds merit in the proposal. This happens only if 60% of the banks that have loaned money agree to do the restructuring. Besides, in volume terms, lenders to 75% of the loan outstanding should agree for the restructuring.
“Mandatory forensic audits will surely make a difference to the CDR process as it will give a clearer picture about fund utilization and probable frauds by borrowers,” said Shubhalakshmi Panse, chairperson and managing director of Allahabad Bank.
Allahabad Bank already conducts forensic audits in some cases where it feels “uncomfortable” about the promoters’ track records, Panse said.
A forensic audit also serves as an important legal tool for banks against fraudulent promoters as information gathered through such scrutiny can be used as evidence in a court of law.
Such audits might not be enough in reducing the losses of banks. “I do not think a forensic audit can change things dramatically,” said Saikiran Pulavarthi, a banking analyst at Espírito Santo Securities, a Mumbai-based brokerage. “Instead, banks need to have a hands-on approach on the money they lend. Banks should exercise caution when they give money and monitor loan accounts.”
Currently, banks conduct a so-called techno-economic viability study of borrowers’ projects before recasting loans, but this is “not enough” to predict frauds, said another official of a state-run bank. “A lot of pending CDRs or those under process could get blocked if forensic audits were conducted on them,” this person said.
Indian banks recast Rs.11,000 crore of additional loans under CDR in the three months ended 30 September, most of which were from the iron and steel, and infrastructure sectors. This included aRs.3,000 crore recast of pipe maker PSL Ltd and a Rs.4,000 crore recast of Bombay Rayon Fashions Ltd.
The final figure for the quarter will be around Rs.15,000 crore as a few more cases are likely to be approved. With this, the total loans restructured by banks under the CDR platform on a cumulative basis rose to Rs.2.65 trillion at the end of September.
In the June quarter, about Rs.20,000 crore was recast under CDR and Rs.15,000 crore in the March quarter.
The quarter-on-quarter decline in the CDR amount doesn’t reflect any improvement in the health of corporations as the final approval of the proposal comes with a delay of few months.
In fact, between July and September, banks referred 31 cases to the CDR cell worth Rs.25,000 crore. This means that many proposals are still under consideration and may reflect in the next quarter.
Besides CDR, banks also bilaterally restructure the loans. Although an aggregate figure for bilateral loan recasts is not available, bankers say such restructuring may nearly equal the CDR figure.
About 25-30% of restructured loans is likely to turn bad in the absence of a strong economic recovery, analysts said. Banks need to set aside more money as provisions against restructured advances. If a loan turns bad, the provision rises further.
Many projects are stuck with clearance delays and the slowdown in global markets has hampered exports, further impacting the cash flows of local firms. Around 215 infrastructure projects worth aroundRs.7 trillion have been held up, according to an April estimate by the finance ministry.
Gross non-performing assets of 40 listed banks grew to Rs.2.08 trillion in June, up 39.78% from Rs.1.49 trillion in the same period last year. Rising bad loans hurt the profitability of banks as they need to set aside money to cover such loans.
On its part, the Congress-led United Progressive Alliance government has been struggling to revive industrial activity by unclogging the policy logjam holding up projects. A cabinet committee on investment has been set up to get stalled projects off the ground. The panel has cleared 36 projects that envisage an investment of Rs.1.83 trillion, finance minister P. Chidambaram said in August.
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