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Business News/ Industry / Govt flags concerns over evergreening of loans
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Govt flags concerns over evergreening of loans

Bad loans and violations of lending practices, like the bribe-for-loans scam involving Syndicate Bank chairman S.K. Jain, have prompted the finance ministry and RBI to take such measures

India’s banking system is already dealing with a significant rise in non-performing and stressed loans. Photo: Pradeep Gaur/MintPremium
India’s banking system is already dealing with a significant rise in non-performing and stressed loans. Photo: Pradeep Gaur/Mint

Mumbai: State-run lenders have been directed by the finance ministry to end the practice of extending fresh loans to borrowers so that they can pay off old overdue loans, a step that some bankers say may increase the pile-up of bad loans in the banking system.

The department of financial services (DFS) has asked chiefs of all state-controlled banks to end such practices and take corrective action in a 2 September letter. Mint has reviewed a copy of the letter.

“While examining some cases, the committee headed by secretary DFS and Central Vigilance Commission noted that the practice of extending credit facilities for adjusting overdues is not proper," the letter said. The committee also observed that adjustment of overdue loans may enable the borrower to project a better financial health, according to the letter.

Rising bad loans and violations of lending practices by some state-run banks, such as the bribe-for-loans scam involving Syndicate Bank chairman S.K. Jain, have prompted the finance ministry and the nation’s central bank to seek stricter checks before sanctioning loans. The tighter lending norms may further slow credit growth and add to the pile-up of bad assets as access to funds will be restricted to even genuine borrowers.

While the banking system needs to avoid the so-called evergreening of loans, it will be difficult to establish whether the funds sanctioned to a borrower will be used for repaying previous dues or for genuine business purposes, experts said. “The best way ahead is to keep a close watch on the borrower’s business and see whether there is a genuine need for funds to grow further," said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Ltd, a banking consultancy firm. “A good banker will always sense an attempt to use part of loans to repay previous dues and stop it."

It is not uncommon for a bank to extend a short-term credit facility to a borrower to help him cover dues on an existing loan, even though this is not standard practice, according to three bankers, who declined to be named.

“Good borrowers who are stressed will sometimes require handholding from the lenders. There is nothing to frown about. If someone is misusing the system, then they need to be penalized, but circulars like this will discourage bankers from helping genuine cases," said a former senior executive of a large state-run bank.

Non-performing assets could rise further if such facilities are completely stopped, said a second banker.

India’s banking system is already dealing with a significant rise in non-performing and stressed loans. Gross non-performing assets (NPAs) of 40 publicly-traded banks stood at 2.52 trillion as on 30 June, an increase of 21% from 2.08 trillion a year earlier. While gross NPAs are just over 4% of total loans in the system, stressed assets, which include restructured loans, are well over 10% of the total advances. While in some cases, companies take short-term loans from their existing banks to help cover their dues, in other cases companies have been known to take loans from one bank to repay another.

“In many companies, we have seen borrowers taking loans from one bank and repaying others because they cannot generate enough income to repay in time," said the second banker cited above. “In good times, most of these companies went for aggressive expansion, but are now staring at incomplete facilities and projects which are not yielding returns."

A third banker said that the finance ministry circular will ensure that such loans become a rarity. To some extent, the Reserve Bank of India has already tried to curb cases where borrowers use funds from one bank to repay another, by the formation of a Central Repository of Information on Large Credits (CRILC) under its January 2014 guidelines for management of stressed assets.

The central bank has asked lenders to share information with CRILC on a quarterly basis regarding borrowers having exposures of 5 crore and above, including information regarding written off accounts, balance of current account and information regarding non-cooperative borrowers. In addition, banks need to submit information as and when a large borrower’s account becomes overdue for 61 days or a joint lenders’ Forum is formed in this regard.​

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Published: 15 Sep 2014, 01:14 AM IST
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