RBI may put cap on size of lender consortiums to control bad loans

By: ENS Economic Bureau | Mumbai | Published:September 16, 2015 2:31 am

The Reserve Bank of India (RBI) is considering a proposal that would limit the number of banks in a single lenders’ consortium in a bid to tackle the growing menace of non-performing assets (NPAs).

RBI deputy governor R Gandhi said the suggestion is to have a regulatory limit on the number of members in a consortium or multiple banking arrangements so that every member has at least 10 per cent of the exposure and will have serious independent credit appraisal and credit monitoring.

“A suggestion that has come relates to limiting the number of banks and financial institutions that should be permitted in a consortium or even in a multiple banking arrangement,” Gandhi said. Banks with a meagre share don’t have incentives to independently assess the proposal and they typically go by one that has a bigger share. Even if the bank has in-house technical capabilities, with a small share it’s voice is not strong enough. Gross NPAs are now over Rs 3,00,000 crore.

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Gandhi said there is an urgent need for banks “to reduce their stressed assets and clean up their balance sheets lest they become a drag on the economy.”

“Banks are required to put in place proactive credit risk management practices like annual/half-yearly industry studies and individual obligor reviews, credit audit which entails periodic credit calls that are documented, periodic visits of business site, and at least quarterly management reviews of troubled exposures/weak credits,” he said.

“There’s a tendency among banks to withdraw support once an account is classified as an NPA. The purpose of classification should not be to stigmatise accounts. Banks should make a distinction between wilful defaulters and those defaulting due to circumstances beyond control,” Gandhi said.

He said there’s a suggestion to prepare a ready list of management and technical experts and specialists whose services can be availed by banks, financial institutions or the asset reconstruction companies whenever the JLFs (joint lenders forums) decide to change the management under a CAP.

On the issue of pricing of NPAs, Gandhi said: “Currently there is no meeting point between price expectation of sellers and bid price by reconstruction companies which is also evident from the low success rate of auctions.”

This also proves to be a hindrance while bringing in more investors willing to invest in the security receipts being issued by the RCs to raise funds for acquisition of NPAs. Investors in stressed asset portfolios expect high returns, based on high-risk, high-reward principle, which securities and reconstruction companies find impossible to offer if the assets being acquired are not realistically priced.

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