Analysis: RBI's new provisioning norms are badly timed

When corporate India is reeling through multiple crisis and desperately needs as much rope as it can get, the central banker has decided to tighten provisioning norms and make debt restructuring difficult

A banker has often been described as a person who offers an umbrella when the weather is fine and takes it back at the first sign of rains. These fair-weather friends have done it again.

At a time when corporate India is reeling through multiple crisis and desperately needs as much rope as it can get, the central banker has decided that this is the time to tighten provisioning norms and make debt restructuring difficult.

RBI has said that loans recast after April 1, 2015 should be classified as non-performing asset (NPA) and provisioning norms for fresh standard restructured advances would be increased to five per cent from 2.75 per cent, for the interim period from June 1, 2013.

There is nothing wrong in what the central banker is saying. Technically all restructured loans are non-performing assets as a promoter of a company approaches a bank for restructuring only when he is either not in a position to repay even the interest or when he foresees that going forward his financial position would be tighter. If implemented today, the new provisioning norms will increase NPA levels of banks from 4.8 per cent in December 2012 to 11.6 per cent.

However, what these provisioning norms will do is discourage corporates to go in for restructuring. Bankers would prefer ever-greening the account rather than pushing it towards restructuring. A restricted or an NPA account is a black mark on a banker’s career, and he would try his best to prevent it as it impacts his career prospects, especially in nationalised banks. Evergreening, which is issuing a fresh loan to repay the old loan, will only delay the inevitable and lead to a bigger mess going forward.

From the promoter’s point of view too, RBI’s recent requirements for restructuring are too stringent. Promoters will not only have to bring in more funds as part of their contribution but will also have to give personal guarantees. What this means is that the promoter’s house and other assets will also be at stake in case of a default.

Indian entrepreneurs, especially those operating in the SME segment in any case, put in a lot of their personal wealth to keep their business running. Pointing a gun on their head for recovery will only lead to a disastrous end. The rule is fine for a willful defaulter, but where the overall business environment itself is going down, such actions are completely uncalled for.

From a bank’s point of view, they are keen on protecting depositors’ money. But such stringent norms have only led to proliferation of ‘parallel banking’ where the players have their own ways of loan recovery.