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Whitewashing the banking sector

What’s the real level of non-performing assets (NPAs) in the Indian banking system?

Written by George Mathew | Published: September 8, 2012 1:40:49 am

What’s the real level of non-performing assets (NPAs) in the Indian banking system? NPAs,or loans defaulted by borrowers for a period of 90 days,could be more than double of what has been already announced by the banks as they have found a way out to repackage the problematic loan accounts and brush them under the carpet.

The government and the Reserve Bank of India had announced that total NPAs work out to Rs 1,23,462 crore,or 3.48 per cent of the total advances,as of June 2012. This could be just the tip of the iceberg. Estimates are that loans of Rs 1,60,000 crore have already been restructured in 2011-12 and in the first quarter of 2012-13. Herein lies the catch. If bankers are to be believed,loans restructured by banks were potential non-performing assets,and if these loans were not restructured they could have been classified as NPAs. Bankers call this process evergreening of loan accounts,which is nothing but understating of NPAs. Taken together (NPAs already announced and restructured loans),the real NPA could be anywhere near Rs 3,00,000 crore,or 60 per cent of India’s fiscal deficit of Rs 5,00,000 crore or 7 per cent of total bank advances. A sizeable chunk of the restructured loans belongs to big corporate houses,which stand to gain by concealing the negative impact of their overleveraged positions and financial profligacies. These big corporate houses rush to the CDR (corporate debt restructuring) cell of banks when their loans are about to be classified as NPAs. Once a loan is admitted into the CDR cell,the list of sops includes a moratorium on repayment of principal and cuts in interest rates,along with fresh loans conversion of existing loans into equity.

The RBI has now stepped up the vigil. On the issue,RBI Deputy Governor KC Chakrabarty,at a recent Corporate Debt Restructuring Conference in Mumbai said,“Provisions of the CDR mechanism have not been used very ethically and judiciously,giving rise to the unprecedented increase in cases under CDR.” He also said that when it comes to restructuring,our banks have a substantial bias towards more privileged borrowers vis-a-vis small borrowers. In simple words,if you approach the bank for restructuring of your Rs 5 lakh home loan,it will make you run around and finally reject your request. It’s no wonder that the ratio of restructured accounts to gross advances is the highest for the industries sector at 8.24 per cent (with medium and large industries sector being at 9.34 per cent). The ratio for agriculture stood at 1.45 per cent,while that for services stood at 3.99 per cent (with micro and small services being 0.94 per cent).

The problem could intensify. Rating agencies estimate that more loans worth Rs 1,65,000 crore are likely to seek restructuring in the next fiscal. This effectively means problematic loans can hit Rs 500,000 crore if the economy doesn’t pick up in the coming months. This leads to a big question: Did banks conduct a proper appraisal and due diligence before extending loans to big corporates?

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