It should effect a tighter exit clause, where promoters bring in at least 20-25% of the value lost, not just 15%

If it has been a long, hot summer and one of big discontent for India?s banks, some of it is of their own making. Having lent a tad recklessly in the good times, when deposits were cheap and borrowers were queueing up for loans, they?re now grappling with large sums of loans to be recast and serious slippages to boot. In some instances, banks don?t even have enough of a cover in terms of a pari passu charge on the assets because they have sneaked into corporate accounts in a practice of what?s called multiple banking. Without recourse to assets, they could be left defenceless if the account goes bad. Some banks simply haven?t taken the trouble to make sure they have enough collateral; one report doing the rounds is of how banks that control the more viable assets of a particular company are refusing to ?share? those with other lenders because it would then dilute the value of collateral.

While it?s true that banks need to be responsible for themselves, perhaps RBI needs to put an end to multiple banking; because what?s happening is that the irresponsible behaviour of a few is threatening to jeopardise the portfolios of those more careful. Given that there is an increasing number of companies to deal with in an increasingly complex environment, allowing banks to muzzle into accounts can?t be a good idea. Also, the central bank could consider higher provisioning limits for restructured loans?currently it?s just 2%?since that would act as a deterrent in itself.

The numbers being talked about are disconcerting. Some R10,000 crore worth of loans have been referred to the Corporate Debt Restructuring (CDR) cell already since April, and we?re just in the second week of June. Last year, the CDR cell was inundated with loans of close to R67,000 crore, of which borrowers were given easier terms for about R40,000 crore. Simultaneously, there?s the bilateral restructuring taking place between banks and State Electricity Boards (SEBs) or textile mills or even airlines. Analysts estimate that close to 35% of the exposure to SEBs has been restructured and, therefore, there could be more coming up.

Indeed, the queue before the banks and the CDR cell seems to be growing longer even as the amounts to be recast are becoming bigger. In the March 2012 quarter, State Bank of India recast loans worth R5,134 crore on the back of a R8,000 crore recast in the three months to December, 2011. At Punjab National Bank, the number was a shocking R8,000 crore for the March quarter while for Bank of Baroda it was R5,100 crore.

As a share of the total outstanding loans for the banking system of just over R45 lakh crore, these numbers may not seem alarming just yet. But the ratio of non-performing assets and restructured loans, at close to 8% of the total assets, is not small. Of course, the bigger burden is being shouldered by the public sector banks and the private sector banks are relatively better off. The point is that given the fairly severe downturn in the economy, things could get worse before they get better; there are estimates of at least R15,000 crore waiting to be recast in the June quarter alone. The big chunk of this would be accounted for by SEBs. But even otherwise an increasing number of borrowers, whether in the iron and steel sector or vendors to power distribution companies, are in trouble for one reason or another.

This time around the slippages are more on account of corporate loans rather than retail defaults that one saw post the Lehman crisis in late 2008 and early 2009. At that time, crores of retail loans were written off, much of which was given against credit cards or two-wheelers; one private sector bank needed to be bailed out because it had such a big hole in its retail book.

RBI doesn?t seem to be overly worried since it estimates that typically 15% of loans that are recast turn into non-performing assets. However, banks? exposure to the SME space today is far higher than it was four or five years back, since they did disburse large sums to these unit between 2005 and 2009. The rotten apples, though, are turning out to be companies that were overly ambitious; the list of names with the CDR cell include the likes of GTL, Bharti Shipyard, Hotel Leela and Moser Baer Solar. Of course, banking is all about taking risks but it?s also about protecting the downside.

It?s only now that the CDR cell is contemplating a tighter exit clause and a bigger contribution from promoters, convinced that banks are taking bigger hits. That?s a good approach; promoters should bring in at least 20-25% (or perhaps even 40%) of the value lost, and not just 15% as they do now. Also, converting debt into equity makes little sense when the ship is sinking as we saw with Kingfisher, and even quasi-equity instruments like cumulative convertible preference shares don?t help. Bankers need to have more directors on the boards of companies, insist on unconditional guarantees and demand that equity be written down if necessary. It?s time they got tough.

shobhana.subramanian@expressindia.com