THE change in the definition of a default of a loan — which is a delay in payment even by a day — could leave Indian banks with another mountain to climb as many borrowers had at least one repayment “overdue” in the last six months worth Rs 6,60,000 crore, according to a study by TransUnion Cibil, a leading credit information company. The accounts of these borrowers could potentially be classified as a default or as a bad loan, it said.
A loan is classified as a non-performing asset or a bad loan if the interest and/ or installment of the principal amount remains overdue for over 90 days. The RBI scrapped all loan recast schemes in February and said that if borrowers delay payment even by one day, it should be considered as a stressed asset and banks should begin resolution. Lenders will have to initiate insolvency resolution under the Bankruptcy Code if a borrower fails to pay at the end of the 180 days of first default.
These accounts of borrowers who have defaulted for even a day may potentially be tagged as ‘default’ if not NPAs, according to TransUnion Cibil, which compiles data on bad loans. While these borrower accounts had overdue payments at one stage and banks classified them as special mention accounts (SMA) they were not classified as NPAs. TransUnion Cibil says that these accounts are “irregular”. Such accounts are in addition to the recognised NPAs of Rs 10.4 lakh crore. The total bad debt, including recognised NPAs, unrecognised NPAs and irregular accounts, of banks could be as high as Rs 20,10,000 crore, according to TransUnion Cibil study. “Irregular borrowers present a higher risk of turning into NPAs,” it said.
“Future NPAs are also driven by the stock of “irregular accounts” which from a technicality perspective are equivalent to a ‘Default’ by credit rating agencies who tend to follow the ‘one rupee, one day delay as default’ as per global best practices,” TransUnion Cibil has said in the study shared with The Indian Express.
According to Cibil, the three components of bad debt are: gross recognised NPAs of Rs 10.4 lakh crore, unrecognised NPAs (standard exposure of borrowers who have a non-trivial portion of their total exposure recognised as NPA by other banks) at Rs 3.1 lakh crore and irregular exposure (special mention accounts of various severity or are otherwise overdue) of Rs 6.6 lakh crore.
Cibil said ‘unrecognised NPAs’ occur because banks in which an account was ‘standard’ were prima facie not expected to tag it as NPA, even though the borrowing entity may have been tagged as NPA by other lenders. However, these borrowers are classified as imminent ‘NPA’ and more often than not they slipped into the NPA status, it said.
Going forward it is likely that a significant portion of this Rs 3.1 lakh crore exposure is formally recognised as NPAs, unless of course the borrower’s economic fundamentals improve to such an extent that they become ‘standard’ assets on an overall basis. However the spike in gross NPA, if it happens, will not be because of incremental economic deterioration of the asset but due to formal recognition of the same, Cibil said.
While gross NPAs have risen from Rs 8 lakh crore in March 2017 to Rs 10.4 lakh crore, ‘unrecognised NPAs’ have declined from Rs 5.5 lakh crore in March 2017 to Rs 3.1 lakh crore in March 2018. This may be attributed to regulatory push in ‘cleaning’ banks’ books. Exposure to ‘irregular borrower’ has reduced from a peak of Rs 7.9 lakh crore in September 2017 to Rs 6.6 lakh crore in March 2018. “This development to some extent may be owing to better payment discipline amongst corporate borrowers which coincided with implementation of Insolvency and Bankruptcy Code (IBC), it said.
Satish Pillai, MD & CEO, TransUnion CIBIL said: “This analysis suggests that the cumulative effort of the RBI, government and banks together are showing early signs of success as the stock of stressed assets and high risk debt is coming down across India’s banking system. Just looking at the rising gross NPA rate may not give any indication that the inflection point in bad debt has been reached.”
“The silver lining is that the overall NPA growth is expected to stabilise post September 2019 with a possibility of declining thereon if there is a strong recovery from identified NPAs,” Pillai said.