Lessons learnt?

Aug 02 2014, 02:01 IST
Comments 0
SummaryBanks need to do more stress tests before lending.

While the economy picking up will put a lot of projects back on the rails and help banks recover a larger part of their loans, there are important lessons to be learnt. For one, with the revenue estimates for a lot of projects based on the economy growing at 8%-plus and a friendly regulatory environment, the sharp deterioration in asset quality over the last couple of years was only to be expected—restructuring via the CDR cell shot up by 23% in FY14, while slippages rose to 18% because a lot of past restructuring failed.

While it may not have been possible to capture all the variables—shortage of gas, delayed environmental clearances or problems in acquiring land—bankers could certainly have taken far greater care while assessing the financial wherewithal of the promoters they were lending to and the collateral they were asking for. That’s one area where they slipped up badly, lending disproportionate sums to entrepreneurs who simply didn’t have the resources to tide over a slowdown.

Hopefully, bankers will be circumspect in the next round of investments, expected to kick off in a year or so. For one, they need to be tempered in their expectations of economic growth and pencil in more regulatory uncertainty; in any case, funds must not be disbursed until all clearances are in. More important, as SBI chairman Arundhati Bhattacharya observed in an interview to this paper recently, is the need to check how deep the promoter’s pockets are, how he intends to fund the project and whether he has a Plan B. Bhattacharya’s point is best illustrated in the recent instance of dues of Delhi electricity discoms where, despite not being paid the full arrears for years, the Tata discom was able to pay suppliers—the other discoms delayed payments—by leveraging other group resources. Also, banks need to be disciplined, in not lending out of turn and keeping the consortium in the loop, a practice that, if not followed, lets the promoter get away with a free ride. That kind of irresponsible behaviour must stop; RBI’s early alert system to spot potentially toxic assets will, to a large extent, take care of some of these issues, but at the risk of using a tired cliché, prevention is better than cure.

Ads by Google
Reader´s Comments
| Post a Comment
Please Wait while comments are loading...