Banks to follow uniform loan classification rules, share defaulter information-ET
MUMBAI: RBI Governor Raghuram Rajan is leaving no stone unturned in his efforts to end promoter abuse of the benign loan restructuring regime and is soon poised to mandate all banks to stick to uniform loan classification norms.
Three people familiar with the idea said the governor, who has been meeting bank chairmen over the past two to three weeks independently and some in groups, has said lenders should share information about defaulting clients. Rajan is building a repository of information about defaulters that could help banks ensure they do not get duped by unscrupulous promoters.
"Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures," he had said at his first press conference after taking charge.
The Indian banking system, especially state-run banks, is facing a continuous downgrade by ratings companies such as Standard & Poor's and Fitch because of rising bad loans and concerns that many restructured loans could turn bad.
The absence of a repository is believed to have led to some of the biggest losses to banks.Kingfisher Airlineand Deccan ChronicleHoldings, which together inflicted losses of more than Rs 11,000 crore, might have been prevented if the banks had shared information and a repository was in place.
Deccan Chronicle Holdings, which went public in 2004, took loans from several banks to expand the circulation of Deccan Chronicle newspaper in several cities and started a new business newspaper, Financial Chronicle. However, the slowdown affected the company's expansion plan and profitability.
"Nobody knew how much Deccan had borrowed from the banking system. Today, Cibil has information on all borrowers.
However, if banks share this information with RBI, it would get information on the banking system's indebtedness to companies," said Romesh Sobti, managing director and chief executive officer, IndusInd Bank. Numbers compiled by the Corporate Debt Restructuring Cell shows loans worth Rs 2,29,013 crore of 401 companies have been restructured as of March 2013.
Indian banks' stressed assets rose to 9.1% of total loans (NPL ratio: 3.4% and restructured loans ratio: 5.7%) in fiscal 2013, from 6.1% a year before, says Fitch Ratings
Three people familiar with the idea said the governor, who has been meeting bank chairmen over the past two to three weeks independently and some in groups, has said lenders should share information about defaulting clients. Rajan is building a repository of information about defaulters that could help banks ensure they do not get duped by unscrupulous promoters.
"Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures," he had said at his first press conference after taking charge.
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The Indian banking system, especially state-run banks, is facing a continuous downgrade by ratings companies such as Standard & Poor's and Fitch because of rising bad loans and concerns that many restructured loans could turn bad.
Deccan Chronicle Holdings, which went public in 2004, took loans from several banks to expand the circulation of Deccan Chronicle newspaper in several cities and started a new business newspaper, Financial Chronicle. However, the slowdown affected the company's expansion plan and profitability.
"Nobody knew how much Deccan had borrowed from the banking system. Today, Cibil has information on all borrowers.
However, if banks share this information with RBI, it would get information on the banking system's indebtedness to companies," said Romesh Sobti, managing director and chief executive officer, IndusInd Bank. Numbers compiled by the Corporate Debt Restructuring Cell shows loans worth Rs 2,29,013 crore of 401 companies have been restructured as of March 2013.
Indian banks' stressed assets rose to 9.1% of total loans (NPL ratio: 3.4% and restructured loans ratio: 5.7%) in fiscal 2013, from 6.1% a year before, says Fitch Ratings
The latest RBI initiative comes after the banking system had to write off loans worth Rs 12,000 crore given to Deccan Chronicleand Kingfisher.
"The move to set up a repository is a proactive step to prevent fraud," said SK Kalra, executive director of Andhra Bank. "Secondly, this will make it difficult for borrowers to conceal from lenders the loan they have taken from other banks in case the loan is availed through multiple banking routes."
Currently, under the consortium banking route, each lender is mandated to inform all lenders about the loans on their books. However, in case of multiple banking facility, lenders are unaware of loans a borrower has availed from other banks.
Conflict between private and public sector lenders and qualification of assets are also delaying the recovery process.
"If one bank treats it as a standard asset, the company can always approach that bank for fresh funding," said a state-run banker who did not want to be identified. "In the case of Kingfisher, since the company is non-operational now, that risk is not there."
"The move to set up a repository is a proactive step to prevent fraud," said SK Kalra, executive director of Andhra Bank. "Secondly, this will make it difficult for borrowers to conceal from lenders the loan they have taken from other banks in case the loan is availed through multiple banking routes."
Currently, under the consortium banking route, each lender is mandated to inform all lenders about the loans on their books. However, in case of multiple banking facility, lenders are unaware of loans a borrower has availed from other banks.
Conflict between private and public sector lenders and qualification of assets are also delaying the recovery process.
"If one bank treats it as a standard asset, the company can always approach that bank for fresh funding," said a state-run banker who did not want to be identified. "In the case of Kingfisher, since the company is non-operational now, that risk is not there."
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Banking bad
The Indian Express : Fri Oct 04 2013, 02:15 hrs
S&P's warning is a reminder that India's bad loans need some quick policy action.
Credit rating firm Standard & Poor's warning that Asia could turn out to be the world's next hot spot when it comes to a banking crisis is alarming, but if push comes to shove, the Chinese government — and it is China that S&P is really talking about — has enough money to recapitalise the banking sector. While S&P sees significant risks of bank loans turning into NPAs in India, it's comforting that various stress tests done by the RBI suggest that the problem isn't anywhere near spiralling out of control. That said, there is little doubt that there has been a dramatic increase in the number of loans coming up for recasting at the corporate debt restructuring (CDR) cell.
Nor does it look like these recasts are going to slow down anytime soon since, as a Credit Suisse report points out, 10 top Indian groups, which account for 13 per cent of the loans from the banking sector, double that five years ago, have a very low "interest cover" — that's their pre-interest and pre-tax earnings as a ratio of their interest obligations — and the number is falling. Which is why, even as banks restructure loans, they need to have some more serious back-up plans.
One plan under discussion is to get promoters to give up a significant share of their equity so that, in case the loans are still not repaid, the promoters can be removed and the company can quickly be resold. Of course, banks writing this into contracts and being able to enforce them are two different things. As the Kingfisher example shows, recalcitrant borrowers find it possible to get relief from courts. A better idea would be to transfer the shares to the banks before the CDR and, if payments are made on time, the banks can agree to transfer the rights back to the promoters. Given the high degree of poor loans concentrated in some industrial houses, the RBI would also do well to revise downwards the maximum loans that banks can give to companies owned by the same promoter group.
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