Debt Recovery Guru - Debt Collection India Portal, Latest Indian Credit Industry News , Jobs, Events, Directory

Sunday
Nov 19th
Text size
  • Increase font size
  • Default font size
  • Decrease font size
Home Blogs Redundant practices hurt asset quality of banks

Redundant practices hurt asset quality of banks

E-mail Print PDF
The Financial Stability report of Reserve Bank of India said that banks remain comfortably capitalised. However, the apex bank is concerned about the deteriorating quality of the banks' loan books. In the year ending March 2012, the ratio of gross non-performing assets (NPAs) rose to 2.9 percent of total loans, up from 2.4 percent a year ago.
 
Cases of debt restructurings are flowing in from every sector of the economy. In the past year, banks sought to restructure a record $12 billion in corporate loans - an increase of 156 percent. Ratings agency Crisil expects the total to double in the coming year. India's Debt Restructuring Mechanism allows banks to ease terms on loans without setting aside provisions. What's more, banks are being flexible with many loans - including $4 billion to Air India and $5.5 billion to loss-making state electricity boards - without either formally classifying them as NPAs or ushering them through the formal mechanism.
 
Meanwhile, evergreening, where banks lend additional money to keep stressed borrowers from defaulting, is common practice. Property experts Knight Frank estimate that at least a tenth of real estate loans are stressed, more than twice the 3-4 percent cited by banks. The level of NPAs on infrastructure lending, around half a percent of total loans, looks suspiciously low, since these loans have increased from 7 to 15 percent of the banks' overall loan books since 2007.
 
The low level of reserves at Indian banks may be encouraging them to fudge the numbers. Most banks reported allowances of less than the RBI's minimum of 70 percent of probable losses on total NPAs. At 69 percent, Indian banks' average level of reserves of bad loans is far below China's 252 percent and Indonesia's 212 percent. Setting aside greater provisions will hurt the banks' bottom lines. But without a bigger buffer, the banks' bad habits will only worsen.
 

 

Advertisement

Advertise on Debt Recovery Guru. Check out options by clicking here!

Advertisement

Advertise on Debt Recovery Guru. Check out options by clicking here!

Newsletter

Follow DRG

TwitterFacebookFeed

Polls

How is the Debt Recovery Industry's Reputation in India?
 

Advertisements