"We must move away from restructuring” deputy governor, RBI

MUMBAI: The Reserve Bank of India's crackdown on rising bad loans may include incentivising banks to set up an early warning system for likely defaults and not allowing them to use restructuring as a ploy to defer providing for such non-performing assets (NPAs) and thus window-dressing their balance sheets.

   

Central bankers from governor Raghuram Rajan to  deputy governor KC Chakrabarty and executive director B Mahapatra have been issuing unequivocal signals that  they're dead set on cleaning up the banking system.  "We must move away from restructuring; there should not  be any category called restructuring," Chakrabarty told a  bankers' conference at the weekend. "The moment it is  restructured, it should be declared as NPA. There should not  be any technical write-off... be prepared for that.'' A technical  write-off is removing a bad loan from the books because it can't  be recovered.

The RBI under Rajan, who took over in September, has been taking a tough stance against loan restructuring as many are said to be gaming the system that's designed to bail out companies affected by external economic factors. Since 2000, Indian banks have written off more than Rs 1 lakh crore in bad loans, many of which first went through the restructuring process.

"In the next few weeks, we will announce measures to incentivise early recognition, better resolution and fair recovery of distressed loans," Rajan told the BANCON conference. "We will focus on putting real assets back to work in their best use. Here again, you bankers have a critical role to play by fighting the natural incentives that are built in to the system. You have to help those with genuine difficulty while being firm with those who are trying to milk the system. with every means at our disposal.                                                                                            

The early detection incentives may be announced in a week's time, Mahapatra indicated.

Although the rules for restructuring have been tightened, some companies are taking undue advantage of the process, officials have said. For instance, promoters borrow money and disguise this as equity when it's actually debt. The governor has made his stance clear on the misuse of restructuring provisions. "The natural, and worst, way for a bank management with limited tenure to deal with distress is to 'extend and pretend' to evergreen the loan, hope it recovers by a miracle, or that one's successor has to deal with it," Rajan has said.

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