FE Editorial : Whats stressing banks

Written by The Financial Express | Updated: Dec 6 2012, 06:49am hrs
On the face of things, RBI is more sanguine about the asset quality of Indian banks than credit rating firm Moodys which has said it finds the loan classification practices weak and believes they mask the extent of the banks asset quality and capital challenges. Indeed, the stress scenarios Moodys outlines are a lot scarier than those in RBIs financial stability reports. But the fact that RBI is mulling the recommendations of a panel entrusted with suggesting new provisioning norms for restructured assets and hopes to put in place a tighter set of rules by end-January suggests the central bank isnt as sanguine as many believe. Meanwhile, RBI has upped the provisioning for restructured standard assets to 2.75% from 2%. Nonetheless, RBI hasnt been too forthcoming on the subject except to say that one big reason for the deterioration in asset quality has been the absence of information-sharing between between banks. It has of course reinforced this point with them while warning penal action.

While RBI may need to react to Moodys somewhat sweeping condemnation of how banks are governed, Moodys also points out that Indias loan classification rules were far more lenient than in other parts of the world; it pointed out that very often bad loans were being categorised as restructured assets in the process allowing banks to get away with lower provisioning. RBI needs to work on this and some of it will probably be addressed in the new rules but simply framing rules may not be enough, there is also something about the lending culture that needs to change. RBI deputy governor KC Chakrabarty, for instance, has pointed out that much of the restructuring doesnt seem transparent and, moreover, that there seems to be some element of discrimination. Neither of these is desirable but the data seems to bear out what the DG is saying: the quantum of restructured loans has hit a huge R50,000 crore between April and October this year on the back of some R67,000 crore having already been recast in 2011-12. More importantly, as the DG highlighted, there is a clear trend of larger corporates asking for easier repayment termsrestructured standard advances for medium and large industries jumped 73% in 2011-12. So either smaller companies are in less trouble or their pleas are simply going unheeded.

While the environment is no doubt tough and there could be genuine cases of companies facing a cash flow crunch, the regulator needs to usher in stricter provisioning norms quickly so that banks are not encouraged to throw good money after bad. The system cant afford any regulatory forbearance right now, its better that banks cut their losses rather than evergreen unviable accounts. Banks have been somewhat reckless over the past few years, which is what has resulted in an unhealthy concentration of risk and its now possible that NPAs and restructured loans could account for more than 10% of banks advances by March 2013. In some instances, like with Andhra Bank, it is at 12.5%, and at others like Bank of India and Corporation Bank, it is 10.4%. Higher credit costs will of course hurt banks balance sheets, but this is the time to preserve capital.