Bankers fear fund diversion, rise in NPAs...

Bankers have conveyed their concerns over a rise in non-performing assets along with possible attempts at diversion of funds from one project to another, as corporate earnings are under pressure due to a slowdown in demand.

The bankers conveyed their fears during their meeting with Reserve Bank of India Governor D Subbarao on the third quarter review of monetary policy yesterday.

“The slowdown will be a long drawn process and not a short episode as was expected earlier. The effects will be felt by banks for a longer period,” a public sector bank chief told Business Standard.

Yesterday, RBI lowered the growth projections for 2008-09 from 7.5-8 per cent earlier to 7 per cent, with a downward bias. The downside risks to growth have amplified due to a slowdown in industrial activity and weakening of external demand. This is reflected in a sharp drop in the index of industrial production (IIP) and shrinkage in exports during October and November 2008. Most service sectors are also expected to decelerate in the second half of the year.

With companies facing cash flow problems, bankers fear that they may resort to diverting funds from one business to another, hoping they would be able to refund the money when the situation improves, bankers said.

“We have to be wary of such risks, especially in case of companies with multiple accounts,” said a banker.

Responding to the concern, a senior RBI official is learnt to have pointed to the code for information-sharing among banks, which have extended loans to the same corporate house. “In practice, very little information gets exchanged among banks,” a banker said.

A review of banks that have so far announced third quarter results shows that there is no sharp rise in gross non-performing assets. “In December, RBI gave us room to restructure loans for a second time without downgrading the status of accounts. This has partly helped in ensuring that some accounts, which could have defaulted on payments, remain standard,” said the credit head with a Mumbai-based bank.

Pawan Agarwal, director, corporate and government ratings at Crisil, said that a prolonged slowdown will mean that earnings could suffer and hamper the ability of companies to repay loans. This could lead to rise in bad loans. The units in the export-oriented sectors and those that are interest rate- sensitive would experience greater stress.