FE Editorial : About time RBI acted

Feb 02 2013, 02:42 IST
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SummaryAt a run rate of Rs 7,000 crore a month between April and December, the quantum of corporate loans restructured by banks has been unbelievably high; even in 2011-12, the total amount of debt recast by the corporate debt restructuring (CDR) cell was a modest Rs 32,000 crore.

At a run rate of Rs 7,000 crore a month between April and December, the quantum of corporate loans restructured by banks has been unbelievably high; even in 2011-12, the total amount of debt recast by the corporate debt restructuring (CDR) cell was a modest Rs 32,000 crore. While there is no doubt that corporate cash flows have been strained in a slow-moving economy, much of the mess that companies find themselves is of their own making—some have been needlessly ambitious while making acquisitions, and others have expanded capacities without the necessary capital in place and find themselves hugely over-leveraged. So far, the Reserve Bank of India hasn’t appeared overly concerned about the size of recasts as it had not tightened the rules for restructuring; banks have been allowed to classify restructured loans as standard assets and till very recently were making a provision of just 2% on these bad loans. Which is probably why they have tended to be generous while granting easier repayment terms for lenders, at times going to ridiculous extents—like converting a part of the debt of Kingfisher Airlines into equity. However, that should soon change, since RBI now suggests, in a set of draft guidelines based on the recommendations of the Mahapatra committee, that after 2015 any restructured loan will be automatically downgraded to a sub-standard one. In the meantime, provisions on the current portfolio of restructured loans will be upped from 2.75% to 3.75% by FY14 and further to 5% by FY15, and starting FY14, any new addition to the restructured portfolio will attract provisioning at 5%. This, together with other rules—after FY15 even infra loans will attract higher provisioning—should make banks less eager to heed to borrowers’ requests for lenient repayment schedules.

It’s not clear why it was necessary for RBI to make the point that bankers shouldn’t ‘artificially’ reduce the net present value of cash flows by resorting to any sort of ‘financial engineering’ while calculating the diminution in the fair value of the exposure. The comment reflects poorly on banks suggesting that they haven’t always played by the book. They will from now on, since the new guidelines will make it costlier for them to restructure debt; analysts estimate that, in some cases, the cost resulting from the larger provisioning could be higher than the cost of classifying the asset as a non-performing loan. Clearly, in such cases, it would make sense

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