Money & Banking
RBI’s report on restructured loans shirks the issues

While most of the recommendations of the Mahapatra Group fail to address the seriousness of the issue, the RBI may accept the recommendations and banks may happily use restructuring to keep their NPA levels cosmetically low

The report of a Reserve Bank of India (RBI) working group to review the existing prudential guidelines on restructuring of advances by banks/financial institutions, under the chairmanship of B Mahapatra (Mahapatra Group) submitted its report on the 18th July (http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/WRPN180712FL.pdf). The report shirks the problem of bludgeoning NPAs (non-performing assets) in the banking system piling up as restructured loans and suggests solutions which are short term in nature for a problem that is long term—quite like an ostrich burying its head to avoid a danger.

What are restructured loans?
Restructuring of loans happens when large corporate borrowers are unable to pay their loans on time, and they seek the loan to be restructured. Restructuring would mostly involve rescheduling of the loan payments, granting more time to the borrower. This is usually done by making a case that the loan is inherently sound, but that the cash-flows of the borrower cannot meet the current schedule of payments.

Where the company in question is a large borrower and has borrowed from various banks under multiple or consortium lending arrangements, the restructuring proposal has to be forced on all such banks, and hence it goes to a common body of banks called the CDR (corporate debt restructuring ) Cell. If the loan is from a single bank, the bank may obviously enter into a mutual arrangement with the borrower to restructure the loan.  Prima facie, restructuring is done in response to the weakness of the loans—therefore it is quite obvious that a restructured loan is not a healthy loan. However, RBI norms provide that if banks restructure a loan before it becomes an NPA, it is still treated as standard, meaning it does not have to be treated as a non-performing loan. The only consequence is that there is a higher provisioning requirement of 2% in case of restructured loans. This compares with a minimum 10% provisioning required in case of NPAs.

The tsunami of restructured loans:
At the present moment, there is a deluge of restructuring proposals piling up with banks. Many large corporates in core sectors such as steel, infrastructure, tourism, etc are queuing up before the CDR Cell. The reasons are quite obvious—cash-flows out of core sector projects are stuck, and in any case, lots of entities had over-leveraged themselves.

The RBI’s Financial Stability Report of June 2012 was at least candid to admit the bludgeoning position of restructured loans. It showed that the growth rate in restructured advances is nearly three times the growth rate in corporate advances. While banks in India have happily been reporting a reduction in NPA levels, the Financial Stability Report shows that even if 15% of the restructured loans ultimately slip into an NPA category, the NPA levels will be higher than what they were before the global crisis of 2007.

In fact, the situation may be worse than what is shown in the RBI report. First, because it assumes a slippage rate of 15%, whereas, in reality, the rate of fall from restructured to NPA category may be much higher. In fact, the Mahapatra Group itself has said that in stress scenarios, the slippage may be 30%-40%. Second, because the figure of restructured loans taken by the RBI Report is as of 31st March 2011, after which there is substantial surge in the number. In fact, even if one picks up the number on 31st March 2012, the number available on the CDR cell website (which, euphemistically, is called CDR Progress Report) is 292 cases involving Rs1,50,515 crore of debt  (http://www.cdrindia.org/statistical.htm). Let us not forget that this number is not all—there are loads of loans that are restructured without coming to the CDR Cell, and lots of SME loans that also go for restructuring.

The working group proposals:
Sure enough, a bank cannot prevent a loan from getting into problems. Quite often, this happens due to what is called a “systemic crisis”—that is, macroeconomic factors cause a wide-spread downturn. For example, the Eurozone crisis is a systemic crisis. India has not had any such crisis over the last few decades—therefore, whatever loans have gone bad have gone because of bad lending decisions. Borrowers tend to over-leverage, or banks fix repayment terms that are unrealistic.

When loans become weak, banks may have to restructure the loan to realign the loan terms to the cash-flows of the borrower. When a loan is restructured, the loan is said to have become ‘impaired’—that is, its value is adversely affected. The lender is required, as per mandatory accounting standards, to write off an impairment loss when an asset becomes impaired. In case of loans, the impairment loss is the present value of the loan before restructuring, and the present value after restructuring.

One of the key issues before the Mahapatra Group was provisioning requirement. While it does recognise that the best practice, as internationally followed, is to create an impairment provision, “the WG examined the consequences of aligning our restructuring guidelines with this best practice but felt that doing so immediately might act as a disincentive to banks to restructure viable accounts”. This is like saying that to incentivise banks to continue to restructure loans, we must continue to keep a cover on the provisions—almost like a doctor should not prescribe a bitter pill as that does not taste good and would disincentivise the patient.

The Mahapatra Group recommends the rate of provisioning be increased 2% to 5%. In fact, this is a straight-jacket provision and does not take into consideration the real depletion in the fair value of the loan due to restructuring. The sacrifice involved in the restructuring might be more than 5%, or may be less than 5%. A straight 5% provision disregards the impact of restructuring.

Most of the other recommendations also fail to address the seriousness of the issue at stake. For example, the Mahapatra Group makes recommendations about conversion of debt into preference or equity shares, cautioning that banks should only exceptionally convert their debt into preference shares. Preference shares are a non-voting as well as subordinated instrument. Conversion into, as an option, needs to take a futuristic look at the turnaround of the entity, and may be an excellent kicker. However, these are strategies which need to be exercised with great degree of caution. Making any list of rules for the action on the part of banks is like missing the intricacy of the point altogether.

In short, it may be likely that the RBI may accept the recommendations of the Mahapatra Group and banks may happily use restructuring as the device to keep their NPA levels cosmetically low.

(The writer is a chartered accountant, trainer and author. He is an expert in such specialised areas of finance as securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments and microfinance. He has written a book titled “Securitisation, Asset Reconstruction and Enforcement of Security Interests”, published by Butterworths Lexis-Nexis Wadhwa. He can be contacted at vinod@vinodkothari.com. Visit his financial services website at www.vinodkothari.com.)

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COMMENTS

Ashutosh Pai

5 years ago

Dear Mr Kothari,
I agree with you that there should more stringent regulations and transparency regarding credit disbursal by psb and private banks.The banks are in business of lending which has an embedded risk in its business economics.But if you look across the globe where majority of high profile banks are nothing but front for robber barons.You take HSBC, fannie mae,freddie mac,goldman,lehman bros, bear stearns,salomon bros,barclays,jp morgan.Everybody is in the game of making money for themselves.The execs want fat bonuses they dont care about tthe investors and depositors.Whether its blank fein,johnson,dimon,diamond,chuckprince.This is to do with self glory there by putting firms at risk.This game of market cap or growth at any cost will be played again and again.The only thing investor can do is reward the enterprise whose mgmt doesnt have hallucinations of grandeur and where mgmt and execs are not payed exorbitant salaries or will be given a golden parachute.Specially for those who put the enterprise at risk by taking unnecessary risk should be fined and criminal case should be lodged.The civilisation will always find new ways to kill people.But prudent thing is to value the people equally when you value a business, if not more.

regds

Ashutosh Pai

Creating stressful life for all in Mumbai

The government seems to be busy trying to meet the needs of the very small section of our population, not realizing that the inaction is leading to a majority of people getting stressed up affecting their health

Fifty seven percent of Mumbai’s 125 lakh resident population lives within three kilometers of their place of work; 69% within five kilometers and 81% within 10 kilometers. 89% live within fifteen kilometers from their place of work and only 1% live beyond.

44% do not use any other mode of transport for their daily work commute—they walk. 3.1% use bicycles, 2.8% use personal motorcars and 8.5% use para-public transport such as auto-rickshaws and taxis. The rest use the suburban railway system and BEST (Bombay Electricity Supply and Transport Undertaking) buses.

These two statistics reveal a lot. But there is one more statistics that needs to be mentioned before embarking of the topic of this write-up. There are about 75 lakh people who travel by suburban railway system daily, nearly equal to the rest of Indian Railway system users. At peak period extended over three and a half hours in the morning and another three and a half hours in the evening, the crowd that travels in the tidal direction is about 360 thousand persons per hour while the capacity of the services is close to about 160 thousand per hour and will attain a capacity of 180 thousand per hour by 2014. During the off-peak period, the frequency of trains is reduced, but consequently the crowd density in the trains and on platforms does not reduce significantly. There are about 40 lakh bus commuters, three-fourths of who travel by the suburban railway.

With this as background, let us get on with the topic of this article—“creating stressful life for all”.

Practically everyone walks in Mumbai, even most of car users and motorized two-wheeler users—short and very short distances if not those three kilometers. There is no doubt that the Municipal Corporation of Greater Mumbai (MCGM) has improved footpath surface by providing good quality and aesthetics interlocking concrete paver blocks but at many places poor adherence to specifications in laying them have resulted in dangerously unevenness of the surface. Narrow footpaths have not only retained older physical encroachments but added new ones, compelling pedestrians to walk on the carriageways. Motorcars do get parked on the footpaths which is not at all safe or comfortable. Many places have garbage dumped on the footpaths and the stench and unhygienic conditions also gets a pedestrian go on the carriageway; the stench itself creates some degree of stress. There is this lurking fear that one may get hit by the motorcar or two-wheeler, good reason for stress to get built within without realizing it.

Waiting for a bus and boarding it is also stressful as the noise level on the roads are unbearable, fear of bus starting off before one has boarded the bus and then the noise level within the bus after boarding it. Crowd density in the bus is not comparable to the one in the suburban railway system but during peak period, it is still high and this also is a reason for creating stress.

Negotiating the crowd on staircases, foot over bridges (FOBs), platforms and the train plus the anxiety while boarding a train or alighting—the whole process is stressful.
With walking from the railway stations becoming an obstacle race, resorting to taking an auto-rickshaw or taxi has become a norm for people with spare incomes. Not getting a taxi or auto-rickshaw, especially when it rains which keeps roads wet and full of potholes is another reason for stress generation.

After reaching home, is there scope to de-stress? Far from it, as the noise levels from loudly playing TVs and sound systems gives no respite. The only time one can really de-stress is at night time as defined in the noise rule—10pm to 6am. The quietness does provide the necessary restful sleep to cope up with the onslaught of next day’s series of stresses. The residual stress accumulates resulting in ailments such as cardio-vascular as well as high blood pressure, opening up possibilities of stroke. Stresses also triggers off diabetes.

Airline pilots have a strict schedule of number of flying hours they can log per week. This is done so as to keep the pilots alert all through the flights. After all they do carry between 100 to 300 passengers and their lives cannot be put to risk due to physical fatigue of the pilot. There is also a co-pilot and one additional co-pilot for long-haul flights. The crew is also housed in five star hotels to enable them to get restful sleep in a noise-free environment. All this for persons who, in practice, are concentrating only during landings and takeoffs! Most other times, the plane is flying on auto-pilot.

On the other hand, the motorman of the suburban railway system is not only stressed up like any citizen of Mumbai for various reasons mentioned above, but has to be drive the train with full attention all the time, slowing down, speeding up at different locations as per locational requirements, stopping at stations and starting off every three to five minutes, keep attention on the tracks for any technical snag and possible track crossings by commuters lost in thoughts or in conversations on mobile phones or listening to music on earphones oblivious to the approaching trains. A motorman has barely three to five minutes before the return trip begins. This motorman carries about 3,500 persons and sometimes nearer 5,000 in the train he is driving. When repeatedly the motormen’s’ union ask for a co-motormen and also five-day working week and better amenities at terminuses, why is the Railways unable to respond positively? The amenities and breaks in work are after all to de-stress themselves and lower the risks to commuters, is it not? Does the management have to respond only when there is a flash strike by the motormen, causing hardship to 36 lakh commuters (only Western Railway motormen went on strike on Friday evening). Did not the motormen go on a similar strike two years ago for the same purpose?

Railways apart, what is government doing to lower the stress in the stressed up Mumbaikar? It must increase commuting capacity by 180 thousand persons per hour as early as possible. This is possible only by introducing a well designed BRTS (bus rapid transport system). It can give priority to public transport by buses and walkable footpaths at stations and stop this “share a rickshaw” or “share a taxi” system which only encourages road congestion without carrying number of commuters to their respective destinations. Anxiety of not getting the para-public transport will to that extent will reduce and thereby, stress due to that.

The government seems to be busy trying to meet the needs of the very small section of our population, perhaps not realizing that its inaction is leading to a majority of people getting stressed up affecting their health. Under Article 21 of Indian Constitution that is unacceptable.

(Sudhir Badami is a civil engineer and transportation analyst. He is on Government of Maharashtra’s Steering Committee on BRTS for Mumbai and Mumbai Metropolitan Region Development Authority’s Technical Advisory Committee on BRTS for Mumbai. He is also member of Research & MIS Committee of Unified Mumbai Metropolitan Transport Authority. He was member of Bombay High Court appointed erstwhile Road Monitoring Committee (2006-07).  He is member of the committee constituted by the Bombay High Court for making the Railways, especially the suburban railways system friendly towards Persons with Disability (2011). While he has been an active campaigner against Noise for more than a decade, he is a strong believer in functioning democracy. He can be contacted at sudhirbadami@gmail.com.)

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COMMENTS

Rajkumar Singh

5 years ago

It is very easy to blame the government, but very hard to accept that to some extent we are also equally responsible for bearing stressful life.

If the pedestrians are made to walk on the carriageways, it may be because of unevenness of the surface and the encroachment made by the encroachers.

Here, the pedestrians and encroachers are not the government, but the people of India. Such encroachers support those corrupt politicians who in turn provide them protection for their such encroachments.

It cannot be denied that both, justice and injustice are liked, practiced, meted, and preached by the public, we, the people of India.

It is the greed or need of the people which makes them either to go for justice & injustice, or like & dislike.

Those who go for justice, have found an injustice has been done to them. Those who go for injustice, have found a justice has been done to others.

It was the need of the people that made them to go for justice. It was the greed of the people that made them to go for injustice.

You may have to agree that if these both, need & greed, were not there, they would have posed a great problem for the generation of employment.

Because of them, we have the police, lawyer, magistrate, public prosecutor, judge - mostly government servants, to give both, justice & injustice.

If they had not given us both, justice & injustice, we, the people, would have found a vacuum for both, need & greed.

Rajkumar Singh

5 years ago

It is very easy to blame the government, but very hard to accept that to some extent we are also equally responsible for bearing stressful life.

If the pedestrians are made to walk on the carriageways, it may be because of unevenness of the surface and the encroachment made by the encroachers.

Here, the pedestrians and encroachers are not the government, but the people of India. Such encroachers support those corrupt politicians who in turn provide them protection for their such encroachments.

It cannot be denied that both, justice and injustice are liked, practiced, meted, and preached by the public, we, the people of India.

It is the greed or need of the people which makes them either to go for justice & injustice, or like & dislike.

Those who go for justice, have found an injustice has been done to them. Those who go for injustice, have found a justice has been done to others.

It was the need of the people that made them to go for justice. It was the greed of the people that made them to go for injustice.

You may have to agree that if these both, need & greed, were not there, they would have posed a great problem for the generation of employment.

Because of them, we have the police, lawyer, magistrate, public prosecutor, judge - mostly government servants, to give both, justice & injustice.

If they had not given us both, justice & injustice, we, the people, would have found a vacuum for both, need & greed.

sivaraman anant narayan

5 years ago

This article should be emailed to Udhav Thakrey of SS. Especially after his recent angioplasty, again caused by stress, he may appreciate the consequences of stress on people. Given that, he may exhort his corporators to do something useful for the average mumbaikars through the BMC, which his party controls.

What about polymer rupee notes?

Polymer notes would reduce costs and be a challenge to counterfeiters

Thanks to the RTI Right to Information) application submitted by activist Subhash
Agrawal, it is now public knowledge that printing small currency note costs big money!  It costs a good 10% of the face value to print Rs10 note that gets soiled in no time, because of its high velocity of usage.  However, it costs less for higher denominations.
 
What is important, however, is the tragic admission by Reserve Bank of India (RBI) that there is a 95% increase in counterfeit notes in the country over the past five years, most of which, regrettably, have come via Pakistan, and smuggled through the land borders of Nepal, Bangladesh and of course Pakistan. The smuggled counterfeit
currency notes are of higher denominations, mostly in Rs500 and Rs1,000.
 
If polymer bank notes are introduced in India, this will eliminate the backlog of unusable worn out bank notes and combat counterfeiting menace.
 
RBI, according to data available, had initial plans to introduce one billion Rs10 notes “before the end of 2010”. It is not clear as to what has caused this two-year delay so far, as no specific date has been announced for the introduction, even on a pilot basis.  However, even assuming one billion Rs10 polymer notes are introduced this year to
the market, balance of the currency, some 95% of the notes in circulation, will continue to be made with traditional cotton bank note paper!
 
Practically, a quarter century ago, polymer note technology was first developed by Australia which introduced the currency in 1988 and it became the first country in the world to have a complete series of polymer notes by 1996. These polymer notes offer greater security against counterfeiting, last four times longer than the conventional paper notes and are easily recyclable.
 
It is Note Printing Australia, a wholly-owned subsidiary of the Reserve Bank of Australia that prints these polymer notes for a host of other countries as well, including Bangladesh, Brunei, Chile, Indonesia, Kuwait, Malaysia, Mexico, Nepal, New Zealand, Singapore, Sri Lanka and others.
 
Considering the volume of Indian currency notes that is in circulation, and bearing in mind the aspirations to become an international currency, what the RBI plans to do, in terms of bringing in the technology into the country so that it can become self-sufficient rather than be an importer are factors that come to our minds, but which are unclear at this stage.
 
It seems that RBI is conducting some field trials, presumably with Rs10 polymer notes at Mysore, Kochi, Jaipur, Shimla and Bhubaneswar, chosen for their varied geographical locations and climatic conditions, according to the press release as a sequel to Subhash Agarwal’s RTI. However, if this trial is already on, it has been done without fanfare and even those handling these notes may not be in the know of things. Proper and due publicity are essential elements that would elicit intelligent response.
 
In any case, it is now imperative that polymer rupee notes be introduced without any further delay. There ought to be even more greater urgency in bringing out Rs500 and Rs1,000 value polymer notes as this will be first major step to stop counterfeiting. If it makes economic sense, and minting capacity is available, both Rs5 and Rs10 denominations be wholly made in coins, and paper currency be completely eliminated. If need be, a Rs 25 polymer note can be introduced at a later stage.

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US. He can be contacted at anantha_ramdas@yahoo.com.)

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