Bad Loan-Laden Banks Get a Brief Respite from RBI

Cen­tral bank prunes list of com­pa­nies whose loans need to be pro­vi­sioned for

The Economic Times - - Front Page - San­gita.Me­hta@ times­

Mum­bai: RBI eased the pres­sure on banks by prun­ing the list of com­pa­nies whose loans need to be pro­vided for against the risk of de­fault, said three peo­ple with knowl­edge of the mat­ter. The im­me­di­ate out­come of the lat­est de­ci­sion will be bet­ter-than-an­tic­i­pated re­sults at banks in the quar­ter just ended, es­pe­cially state-owned ones that have heavy ex­po­sure to highly in­debted cor­po­rate houses.

In a late evening com­mu­ni­ca­tion on Wed­nes­day, RBI told banks in­di­vid­u­ally that they don’t have to pro­vide in the March quar­ter for out­stand­ing loans to 20 firms, in­clud­ing Jaiprakash As­so­ci­ates and Coastal En­er­gen, out of the 150 it had listed in De­cem­ber. The de­ci­sion was prompted partly by the steps taken by com­pa­nies to cut debt.

“On Wed­nes­day, RBI is­sued a let­ter,” said a banker who did not want to be iden­ti­fied. “Some of the com­pa­nies are re­moved from the list and no new names have been added as yet.”

The lat­est or­der from RBI com­prises two parts — loans to com­pa­nies that can be again con­verted to stan­dard ac­counts, and oth­ers that have to be pro­vided for in the March quar­ter, said the peo­ple cited above.

An as­set qual­ity re­view (AQR) or­dered by the cen­tral bank last year had caused con­sid­er­able heart­burn among banks as RBI de­clared that lenders have to set aside funds against loans given to the 150 cos, in­clud­ing Es­sar Group and Bhushan Steel. Now that the list has be­come a lit­tle shorter, banks that loaned money to com­pa­nies that have es­caped the net could im­prove their bot­tom line.

Banks were forced to make sub­stan­tial pro­vi­sions in the De­cem­ber quar­ter fol­low­ing the AQR. Due to this, a num­ber of banks re­ported record losses — that of Bank of In­dia was .₹ 1,505 crore and IDBI Bank recorded .₹ 2,183 crore. For Bank of Bar­oda, which cleaned up its books in one shot, the loss was .₹ 3,342 crore and for In­dian Over­seas Bank, it was .₹ 1,425 crore. Pro­vi­sions are ex­pected to weigh down Jan­uary-March re­sults as well, but maybe not by so much af­ter the RBI note.

In a re­cent re­port, Ko­tak In­sti­tu­tional Eq­ui­ties warned that the bank­ing in­dus­try as a whole might see its prof­its col­laps­ing be­cause of the need to set aside this amount of cash. It had pre­dicted state-run banks’ net profit to crash 87% and pri­vate lenders to post just a 5% in­crease in the March quar­ter. RBI Gov­er­nor Raghu­ram Ra­jan in De­cem­ber rat­tled in­vestors and bankers by or­der­ing banks to pro­vide for some of the as­sets that the lenders were still treat­ing as stan­dard loans. The cen­tral bank felt that th­ese ac­counts were propped up by banks and were against its guide­lines on bad-loan recog­ni­tion. An­a­lysts es­ti­mated this ex­er­cise would cost banks more than .₹ 70,000 crore.

“Our first fo­cus was on as­sets that were very weak and needed to be clas­si­fied as NPA (non-per­form­ing as­set) un­der our rules,” Ra­jan told re­porters ear­lier this month. Com­pa­nies such as Jaiprakash As­so­ci­ates have re­duced debt through as­set sales. Some of the 150 com­pa­nies were on the RBI list for tech­ni­cal rea­sons, such as the bor­rower not hav­ing pledged shares or the terms un­der which the loan was re­struc­tured not be­ing fully com­pli­ant with rules.

The reg­u­la­tor re­moved a few of th­ese com­pa­nies from the list fol­low­ing rep­re­sen­ta­tions from banks. “Some banks have done more than what we had in­di­cated to them in the third quar­ter,” Ra­jan had said ear­lier this month. “Broadly, they were asked to spread this over two quar­ters. But re­mem­ber that this time (the third and fourth quar­ters) has also given them the op­por­tu­nity to re­ha­bil­i­tate cer­tain as­sets. So let’s see what the fi­nal out­come is but the banks are fully fol­low­ing the spirit of the clean-up that was in­tended.”

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