NPAs Hidden By Restructuring
Tamal Bandyopadhyay has a great article on the growing NPA situation in banks. While many public sector lender NPAs have gone up, the NPAs in private banks have fallen. This could
Some banks are looking for an easy way out to tackle the problem—loan restructuring—but this can only delay the inevitable. In 2009, after an unprecedented global credit crunch, RBI had asked banks to recast loans across sectors where borrowers were under stress. Roughly about 5% of loans were restructured at that time. Many of the restructured loans have started turning bad. That’s not good news. But what is more worrying is that banks have been looking for restructuring loans given to troubled sectors and firms and asking for special dispensation from the regulator so that they do not need to set aside money for such restructured loans, which otherwise would have turned bad. In May, RBI tightened the provisioning requirements on certain categories of NPAs and restructured loans, but that’s not enough. Indeed, restructuring of any loan should be left to the banks’ commercial judgement and if they find that a moratorium on loan repayment or a cut in interest rate could help a borrower repay their money they should be allowed to do so, but banks must set aside money even for such restructured loans till they turn good. Otherwise, restructuring of loans will simply be a mechanism to bring down NPAs.
Essentially, if you restructure a loan, you needn’t reserve much for it (other than 2% – that 2% is chump change). Banks, in the case of Air India, didn’t even want to put in that 2%, which tells you how incredibly levered the system is!
Concept: If I can’t pay back a loan – interest or principal – for three months, I’m a “bad asset” for a bank. But if I say that listen, give me a year, and I’ll start paying back everything, even if you charge me a higher interest rate, then I’m a “restructured asset”. This is how it works in theory. When too many loans go bad, the bank is scared of calling them all bad assets, so they “restructure” even if they know that the loan won’t turn good after a while. The thought is to move the problem to later – not very different from the way it was done in the subprime crisis in the US.
Tamal has it right – when a bank’s loan book grows fast, but the proportion of bad assets falls, and there is an economic slowdown of some sort in India, it all fails the smell test.