Tightening rules

The RBI’s move to crack the whip on bad loans is timely in a situation where corporate loan defaults have been on the rise across sectors like manufacturing, construction, real estate and infrastructure.

By making borrowing costlier for wilful defaulters, RBI is attempting to make banks sturdier and more risk-averse. The ease afforded to corporate borrowers by the banking system when it comes to restructuring loans, often through the exercise of political clout or other means, has partly prompted the rise in delinquencies. The proposed new rules will allow lenders to start creditor crisis talks for any company that owes more than $16 million, if it misses a single repayment for more than 60 days. The 60-day norm -- down from 90 days earlier -- to declare loans as delinquent may be the right medicine in a situation where 10-12 per cent of bank loans have gone bad.

RBI has also discouraged banks from making higher provisioning to cover bad loans. Banks will have to watch out for incipient signs of credit stress. However, the rise of NPAs is not entirely alarming either. Restructured assets still constitute only around 6 per cent of total loans in circulation. The overall gross NPAs for state-owned banks is less than 12 per cent, but still the highest among all banks. PNB’s net profit has more than halved to Rs 505 crore from a year ago, the lowest in six years, because of high provisioning towards non-performing loans. Indian Bank’s net profit fell 38 per cent to Rs 306 crore for the same reason.

Asset deterioration of banks has been perceptible for some time now and by specifying the formation of a lenders committee, the RBI is clearly requiring a timeline from borrowers to settle their outstanding debt. While it would be officially acceptable to call the situation stable for now, the RBI has been pre-emptive in tackling any inherent instability in the banking system by changing the solution for dealing with it from those aimed at removing risk to measures intended to reduce both the risks and consequences of failure for banks. The government has been trying to ensure that banks have more capital financing to give them bigger buffers to absorb losses from bad loans. It and the RBI must further ensure that such losses fall on investors in the banks rather than on depositors or taxpayers.

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