Promoters taking advantage of banks in NPA resolution: RBI

The report added that apart from the banks, since no other stakeholders are interested in resolving the case, it delays the resolution further

The Reserve Bank of India (RBI) has criticised the promoters of large companies, saying they take undue advantage of banks’ fear of recognising a loan as a non-performing asset (NPA).

“Some large promoters take advantage of bankers’ fears about assets turning non-performing to extract unwarranted concessions, without any sacrifice in the value of their stake,” said RBI in its annual report.

The central bank said though it had tried to get the struck projects back on track, certain challenges such as banks' reluctance to label an asset as NPA leading to a fall in profitability has been an impediment in reaching a speedy resolution. The report also added that apart from the banks, since no other stakeholder promoter, tariff authorities and tax authorities — are interested in resolving the case, it delays the resolution further.

“The judicial process, despite a variety of creditor-friendly Bills like the Sarfaesi Act, further tends to hamper the ability of creditors to collect their just dues from influential promoters,” the report stated.

RBI has also been nudging banks for early recognition of NPAs so that provisions can be made accordingly. Regulatory forbearance, where RBI makes it easy for banks to extend and pretend, is not a solution, it added in the report

According to RBI, the overall stressed advances in the system have inched up to 11.1 per cent at the end of March 2015 compared with 10 per cent a year ago. Apart from this, RBI also once again pointed out that there is a mismatch in the rate at which the central bank reduced the key policy rates and banks brought down the base rate. Base rate is the benchmark rate to which all loan rates are linked. “The willingness of banks to cut base rates — whereby they forego income on existing borrowers in order to attract more new business — is muted,” said the report. In this calendar year, RBI has reduced repo rate (the rate at which it lends to banks) by 75 basis points (bps) whereas banks have reduced the base rate by only 25-30bps.

Not only RBI, even the government had questioned banks asking them to explain their reluctance in cutting base rate.

Bankers say the increase in bad loans has been putting pressure on the margins as increasingly the interest-earning assets are slipping into the non-performing class. This has deterred banks from cutting loan rates.