Big corporate loans put banks’ underwriting, monitoring under lens

Chandra is hardly an isolated case. The banking system has seen large exposures to promoter-led businesses associated with Vijay Mallya, Anil Ambani and Venugopal Dhoot, among others, deteriorate, forcing lenders to resort to restructuring, recovery proceedings, insolvency and, eventually, write-offs.

According to Kritika Krishnamurthy, founding partner at AK & Partners, the most rigorous due diligence generally takes place when a loan is first sanctioned. As borrowers build a record of timely repayments, lenders can become more comfortable and gradually increase their exposure.

That comfort can turn into complacency.

“Long-standing relationships can give lenders information that may not be captured in financial statements. The risk arises when promoter reputation, group standing or past repayment behaviour begins to provide disproportionate comfort,” said Sagar Lakhani, partner at Uniqus Consultech.

“For the top 2%, the creamy layer loans, there needs to be more rigorous monitoring,” Krishnamurthy said.

Of course, the banking system is better placed than it was during the bad-loan crisis a decade ago. The asset quality review, insolvency framework, CRILC reporting, special mention account (SMA) classification and tougher provisioning norms have made it harder for banks to postpone recognition of stress.

But recognising and resolving a bad loan is different from preventing it from going bad. That shifts the focus from sanction to surveillance — from how a large loan is underwritten on day one to how closely the borrower is monitored over its life.

Substantial sums at stake:

An RTI response from State Bank of India (SBI) showed that between FY18 and FY26, the lender took 309 loan accounts with combined claims of Rs 1.5 lakh crore to the National Company Law Tribunal (NCLT) and similar forums. It recovered Rs 49,727 crore through resolution plans, implying a haircut of about Rs 1 lakh crore, or 67% of claims.

Separately, SBI said it prudentially wrote off Rs 1.52 lakh crore of loans involving borrowers with outstanding dues of more than Rs 100 crore between FY17 and FY26. Recoveries from these accounts stood at Rs 20,838 crore, or around 14%.

Bank of Baroda (BoB), meanwhile, technically wrote off Rs 35,715 crore of loans involving borrowers with outstanding dues of Rs 100 crore and above between FY21 and FY26. Cumulative recoveries stood at Rs 9,946 crore, or less than 28%. The bank also reported haircuts of Rs 7,817 crore on settlements involving such borrowers during the period.

Across the banking system, lenders wrote off Rs 9.95 lakh crore of loans to large industries and the services sector between FY15 and FY26, according to RBI data presented in Parliament in August.

These numbers do not establish that the loans were poorly underwritten at sanction. But they underline the cost when large exposures deteriorate — and why scrutiny cannot end with the sanction letter.

For large corporate and consortium loans, banks typically assess a borrower’s financial position, projected cash flows, promoter profile, collateral and repayment capacity before approving a facility.

Sanction, however, is only the starting point. A sanctioned limit need not be drawn down immediately, and large borrowers can tap facilities over several years. During that period, their businesses, leverage, cash flows and operating environment can change sharply, making continuous credit assessment as important as initial underwriting.

The largest exposures warrant even closer scrutiny because potential losses are disproportionately high, Krishnamurthy said.

That could mean more frequent reviews of the borrower’s business, reassessment of credit limits and recalibration of exposure as circumstances change. A company that appeared creditworthy at sanction can face a vastly different environment a few years later because of shifts in demand, costs, regulation, climate events or geopolitical shocks.

For Lakhani, a key weakness is whether lenders adequately test a borrower’s ability to generate cash to service debt, rather than lean excessively on collateral or promoter standing.

“The biggest gap remains cash flow underwriting,” he said, adding that banks can rely heavily on sponsor projections and base-case assumptions without sufficiently testing whether a business can continue servicing debt under adverse conditions.

Leverage across a corporate group and interconnected cash flows between entities can further obscure risks. Collateral and promoter guarantees, Lakhani said, should remain secondary sources of repayment, not substitutes for sustainable cash generation.

The issue becomes particularly important during periods of rapid credit expansion, when competition for good borrowers can put pressure on lenders to loosen pricing or underwriting standards.

ECL to the rescue?

That makes the introduction of the expected credit loss (ECL) framework an important test.

“The next 18 months will be the real litmus test. With the introduction of the Expected Credit Loss (ECL) framework, new project and acquisition finance norms, changing Basel credit risk requirements and a revival of private sector capex, banks have to prove that they can identify and price risk upfront and not just deal with it when loans go bad,” Lakhani said.

The RBI has also cautioned that faster credit growth can bring greater asset-quality risks.

“As credit growth speeds up, so does the risk to asset quality. Lenders need rigorous stress testing, early-warning systems, and dynamic provisioning,” RBI Deputy Governor Shirish Chandra Murmu said at the 7th NBFC and HFC Summit.

Murmu also called for greater use of artificial intelligence and machine learning to detect early signs of borrower stress.

“Growth must never come at the cost of underwriting standards,” he said.

The last bad-loan cycle forced banks to get better at recognising and resolving stress. The next test is whether they can spot deterioration early enough to keep large corporate loans from reaching the resolution stage in the first place.