RBI deputy governor?s assertion is borne out by the data, suggesting big gaps in RBI?s regulatory capacity

KC Chakrabarty, deputy governor of the Reserve Bank of India (RBI), has, in a recent lecture, more than hinted that all may not be well with the manner in which loans are being restructured. In fact, the deputy governor has gone so far as to say that neither is restructuring happening ?in a transparent and objective manner? nor is it ?non-discriminatory?. These are serious charges that are being levelled at banks but the data on the ground suggests they might not be totally unjustified. The total restructured standard loans alone were close to R2.2 lakh crore at the end of March 2012, and as a share of gross advances these had more than doubled to 6.8% up from 2.73% three years ago. Clearly, restructured loans have been growing faster than total loans for some time now; over a three-year time frame, the growth in restructured loans?at 43%?far outpaced the increase in advances at 19%. In 2011-12, they jumped 60% while total loans grew at a shade under 17%.

This would indicate then that there?s more than a grain of truth in what the deputy governor is saying and that banks may have been a tad too generous with promoters. Perhaps they were encouraged by the fact that their balance sheets would not have been tarnished even if they recast loans since the assets would be classified as standard assets. Moreover, at 2%, the amount to be set aside by way of provisioning isn?t much. The rather lenient provisioning and asset classification forbearance would, therefore, definitely have shaped banks? attitude towards restructuring, and had the norms been somewhat stricter, they may not have treated the matter so lightly.

Chakrabarty hits the nail on the head when he says the ?possibilities of unviable accounts getting restructured is greater when some kind of regulatory forbearance is available on asset quality and provisioning?. For sure, banks need to take a hard look at each proposal to make sure the enterprise will survive after being given easier repayment terms and the deputy governor?s point is well taken. Otherwise, it could lead to ever-greening of the account.

Chakrabarty?s remark that public sector banks sharing a disproportionate burden of such accounts, however, doesn?t come as a surprise. On the contrary, what is surprising is that, despite being aware of how the government works and knowing fully well that political interference cannot be wished away, RBI didn?t act earlier. Had RBI imposed tougher provisioning norms, it could have shielded the banks to some extent. Even now, the RBI Working Group has recommended that provisioning be upped to just 5% for new restructured loans from the current 2%, which seems rather inadequate.

There?s no denying the economy today is sluggish and that there have been serious supply-side issues hurting companies?the inadequate availability, for instance, of gas or coal or iron ore. But the situation needs to be correctly reflected in the balance sheets of banks; loans that are stressed and could turn bad cannot be camouflaged as standard assets. Moreover, even six months ago, Anand Sinha, deputy governor, RBI, sounded fairly confident about the slippage ratio for restructured loans being 15%. The RBI panel?s most conservative estimate now is that the slippage ratio could be way higher, at 25-30%. As such, RBI might want to increase the provisioning levels for both the existing restructured portfolio as also future additions to it. Also, the regulator may not want to wait for two years before the higher provisioning is applied to standard assets. If, indeed, as Chakrabarty says, regulatory forbearance is causing banks to throw good money after bad?in the sense that unviable projects are being funded?then there?s little reason to wait. However, the panel has said that personal guarantees are a must and that corporate guarantees cannot be a substitute.

The RBI data clearly shows that restructuring is being resorted to more liberally in case of large industries?restructured standard advances for medium and large industries jumped 73% in 2011-12 and the increase was even bigger for the services sector, at 134%. In contrast, smaller borrowers in the agriculture and micro and small enterprises don?t seem to be recasting loans as much. So, Chakrabarty?s question as to whether banks are discriminating against smaller borrowers is a valid one, borne out by the increasing number of large corporates that have managed to wrest more lenient terms for their borrowings from the CDR cell; among these are Hotel Leela, HCC, Bharati Shipyard, Tayal Group and Moser Baer. Even before that, loans of Kingfisher and Air India were restructured, with some of the loans of Kingfisher being converted into equity. However, even after the Kingfisher experience?where the price of the stock has crashed?it?s surprising that the RBI panel doesn?t altogether ban the conversion of loans into equity or convertibles. Hopefully, banks will henceforth not let promoters off the hook and insist they bring in their contributions upfront. Since there have been instances where the promoter?s equity contribution to a project has been financed by debt, banks need to be on their guard.

Indeed, the deputy governor?s observations on banks being able to figure out exactly how leveraged companies are couldn?t have been better-timed. Indian companies today seem to be weighed under enormous sums of debt. A recent Credit Suisse report points out that, in terms of concentration risk, Indian banks now rank higher than most of their Asian and BRIC counterparts. Although the average exposure of banks to the largest group borrower is 4.7% of the total, the maximum exposure is way higher, at 26.1%. The Essar group?s debt is now estimated at close to R94,000 crore, while the GMR group has borrowed roughly around R33,000 crore, the Lanco group approximately R29,000 crore and the Vedanta group around R93,000 crore. Before more damage is done, RBI needs to quickly prune limits for lending to both companies and groups.

shobhana.subramanian@expressindia.com