Reserve Bank of India (RBI) Governor Raghuram Rajan has asked bankers to judiciously apply the latest loan restructuring norms and not use them as a tool to delay identification of bad loans.
The top brass of RBI met the chief executive of several banks in which the director of Central Bureau of Investigation, Chief Vigilance Commissioner, and the Chairman of Bank Board Bureau, Vinod Rai, were present.
On Monday, RBI announced a revised scheme for debt recast, namely, Scheme for Sustainable Structuring of Stressed Assets (S4A). The new norms are only applicable for projects that have commenced operations and where bank loans amount to more than Rs.500 crore. According to the norms, at least 50 per cent of the debt should be serviced over the same period as that of the existing loans and the remaining debt could be converted into equity or quasi-equity instruments.
“RBI highlighted the importance of the new norms and said banks should not misuse the norms,” said a banker who attended the meeting.
The meeting was convened by the Banks Board Bureau following lenders’ complaints of over activism by investigative agencies probing bad debts. Banks are wary to offer one-time settlement of loans to borrowers, which would need them to take substantial haircut in many cases, as they fear being hounded by investigative agencies in case of such deals.
“We have been apprised about the problem we are facing. The investigative agencies should understand that as banks we have to take risks and sometimes things can go wrong,” said a chief executive of a public sector bank who attended the meeting and didn’t want to be named.
Bankers said the representatives of investigative agencies had told them to undertake all the due diligence before extending a loan.
Earlier, the RBI Governor had also cautioned about the increasing interference from investigative agencies by saying it could ‘chill’ lending.
Stressed loan in the Indian banking system has increased sharply since 2012. According to RBI data, the stressed assets ratio (which is the total of that gross NPA, restructured standard assets and Written Off Accounts) for the banking system as a whole, which stood at 9.8 per cent at the end of March 2012, rose to 14.5 per cent at the end of December 2015.
Public sector banks have a disproportionate share of the stress, as during the same period, the stressed assets for government-owned banks increased from 11.0 per cent to 17.7 per cent.
The rise in bad loans prompted the RBI to conduct an asset quality review which identified many accounts that banks need to classify as non-performing. As a result, many public sector banks have suffered heavy losses during the Oct-Dec and Jan-march quarter of 2015-16