The RBI’s recent restrictions on credit facilities extended by Indian banks to overseas entities of Indian companies are likely to increase the amount of reported bad loans, Moody’s said in a report on Monday.
“The new regulations are likely to increase the amount of reported non-performing corporate loans. However, the increase would reflect a truer picture of bank asset quality,” the report said.
The Reserve Bank of India said last week that it would not allow banks to extend external commercial borrowings that merely allow borrowers to repay their existing rupee loans, and said it would also not allow banks to issue non-fund-based facilities such as standby letters of credit for the purpose of allowing borrowers to take loans elsewhere, except in connection with the ordinary course of overseas business.
The rating agency said there is no systemic data on the extent to which Indian corporates have used such practices specifically to roll over existing debt, but anecdotal evidence suggests that these types of credit facilities obscure some banks’ problem loans, and the RBI’s explicit curb on such practices indicates that the practice is not uncommon.
“Further, foreign currency loans of banks, such as Bank of Baroda, Syndicate Bank and Bank of India, which are primarily to Indian corporates or drawdowns on non-credit facilities extended by other banks to Indian corporates, have grown rapidly,” it added.
This stands in contrast to the slow growth of the domestic loan books of these banks, supporting the view that these practices have not been uncommon, Moody's added.
These restrictions come at a time when banks in India are struggling to keep their bad loans under control with the public sector banks accounting for a majority of toxic assets.