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New bad debt reporting norms reveal bigger issues

LiveMint logoLiveMint 11-05-2014 Anup Roy

Mumbai: A change in the Reserve Bank of India’s (RBI) framework for reporting bad debt, or bad debt in the making, has underscored that at worst the problem is bigger than everyone believes it to be, and that at best most Indian companies are happy to stretch repayment schedules as far as they possibly can without being named defaulters.

According to three senior bankers who asked not to be identified, nearly 7-10% of large companies and 20-25% of small and medium enterprises routinely delay interest payments for over 60 days but less than 90 days, just shy of the 91 day window after which an account is termed as a non-performing asset (NPA).

The data is the outcome of following RBI’s new framework under which banks are now required to categories borrowers based on their repayment track record. The new rules came into effect from 1 April. The change is part of the central bank’s efforts to crack down on bad loans and get tough with serial defaulters.

Gross bad loans of 40 listed Indian banks grew to `2.43 trillion at the end of December, a rise of about 36% from last year. Of the 16 listed banks that have reported quarterly earnings for the March quarter, gross bad loans have risen 29.84% compared with the same quarter last year.

Indian banks’ credit to large companies was about `20 trillion as on 21 February, out of the about `25 trillion of loans to industry, according to RBI.

Even if a company is enjoying good financial health, many big companies in India do not pay up until the 80-85th day, said one of bankers. Some state-owned companies are particularly notorious when it comes to this, he said, requesting anonymity.

According to the new stressed assets framework of RBI, all loans above `100 crore should be classified under three categories of so-called special mention accounts (SMA): SMA-0 for those where the borrowers pay up within 30 days of the deadline for payment; SMA-1, where the repayment is made between 30 days and 60 days; and SMA-2, where the repayment is made between 61 days and 180 days.

The third category includes companies that have defaulted on repayments and those that potentially could, an indication that RBI wants to treat late payers as potential defaulters.

“A substantial number of loans falls under this SMA-2 category. With the framework in place, these companies will not be able to approach other banks and ask for additional funds. If the company is found to be a habitual late payer, in future, banks may not even agree to give them working capital loans,” said S.L. Bansal, chairman and managing director of Oriental Bank of Commerce.

The stressed asset framework of RBI is applicable for loans above `100 crore, but banks are expanding it to include loans of lower amounts as well.

“Individual banks will have to closely monitor the accounts reported as SMA-1 or SMA-0 as these are the early warning signs of weaknesses in the account,” RBI said in its framework in March, adding as soon as an account becomes SMA-2, the consortium banks will have to form a joint lenders’ forum and formulate a corrective action plan for early resolution of the stress in the account.

The lenders can then try to rectify the stress and put pressure on the promoters to obtain specific commitments on repayment. If this does not work, the lenders can then restructure the assets or even start the recovery process if there is no clear visibility on the viability of repayment of the loan.

Bankers say the central bank’s efforts could improve repayment discipline.

“Any delay in payment attracts interest on the amount overdue. The companies are happy paying this as long as they can buy some time. Earlier they used to pay at the end of the third month; now, probably they will be paying at the end of the second month. But it is clear that RBI is keeping a close watch and these companies cannot fool banks for long,” said R.K. Bansal, IDBI Bank Ltd’s executive director.

RBI’s framework for dealing with bad loans also requires banks to share the SMA status of loans with a central database on large loans that it maintains.

This sharing of information is likely to put a stop to a practice called evergreening of loans—where a company borrows from one bank at the end of the quarter and repays the dues of others. This way the companies are simply juggling their liabilities, without actually are squaring off their loans.

“The new RBI guidelines are a positive development from the point of view of both banks and borrowers (corporates). Banks can limit their exposure to corporates whose accounts face greater stress. This will bring discipline in the lending practice. At the same time, by clearly specifying the cost of default and non-cooperation, the new RBI framework will also help corporates improve their credit profiles,” said Ramraj Pai, president, large corporates, Crisil Ratings.

The International Monetary Fund (IMF) warned on 29 April that the high debt levels of Indian companies could pose a risk to the country’s financial stability. One-third of the corporate debt in India is held by companies with a debt-equity ratio of more than 3, the highest degree of leverage in the Asia-Pacific region, the IMF said.

And a little over one-third of the $400 billion debt held by around 3,500 Indian companies is held by firms with low interest cover on 30 September, compared to a little under one-third in the preceding quarter, according to a Credit Suisse report released on 19 November.

Bankers hope that a revival of economic growth will help address the problem of bad debts.

“Companies are not asking for big loans any more and banks are also not very willing to sanction big amounts. We can monitor as much as we want, but that does not change the reality that economic growth has slumped and companies are stuck with all their debt and unrealized cash flows,” said a senior official with a state-owned bank who did not want to be named.

Apart from slowing demand, companies have also been hit by delays in executing large projects on account of issues related to environmental and other approvals, land acquisition, and the availability of fuel and other mineral resources.

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