S.S. Mundra for creation of data bank on large borrowers to fix bad loan mess
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Mumbai: Reserve Bank of India (RBI) deputy governor S.S. Mundra called for the setting up of a national information grid which will act as a central repository of data from all regulators and lenders pertaining to large borrowers. Speaking at the Mint South Banking conclave on Friday, Mundra said such a grid will help reduce the information asymmetry currently exploited by some borrowers.
RBI had set up a similar Central Repository of Information on Large Credit (CRILC) in 2014 to help banks identify early warning signs of distress in a borrower through information shared among banks.
“If the lender can cross-check everything from excise, customs and cross-check with other transactions which is recorded information regarding debtor or level of inventory available, when there is a consortium lending, the bank will know the circular movement of money,” said Mundra. This should be over and above the information utilities proposed under the Insolvency & Bankruptcy Code, he clarified.
The grid, once implemented, will be one of the many regulatory reforms being introduced to tackle the bad loan mess. In May, RBI proposed expanding the scope of the oversight committees and a larger role for credit rating agencies.
Earlier, the government had also moved an ordinance empowering the central bank to intervene directly in stressed asset cases. However, Mundra clarified that the regulator will not play an active role in bad loan resolution even as the rules are relaxed. Instead, its role will be to ensure that the “marriage between the borrower and lender happens at the right muhurtham (or auspicious time)”, he added.
The clarification comes at a time when the central bank is engaged in discussions with stakeholders including lenders, asset reconstruction companies, private equity funds and rating agencies to draw up an action plan to deal with the Indian banking system’s stressed asset problem. Mundra acknowledged the need to resolve the problem urgently, but made it clear that the regulator will not permit more time or forbearance to lenders while dealing with bad loans.
“RBI has been always been receptive to what bankers have been saying, we are patient listeners,” Mundra said. The central bank is expected to come out with a revised framework on restructuring so that stressed assets can be resolved in a “value optimising manner”.
However, resolving stressed loans will involve banks taking so-called haircuts, or sacrificing a part of the principal and interest payments due to them. According to S&P Global Ratings, the available pool of capital, especially with public sector banks, to absorb stressed loans remained thin as of the end of March.
According to Mundra, the government being the largest shareholder of public sector banks will have to bring in large part of the capital. This requirement is only going to increase with the introduction of new Indian Accounting Standards (IndAS) next year.
“We will move from incurred loss to expected credit loss. Globally, this move has resulted in extra provisioning requirement to the tune of 20-30%. I don’t see any reason why Indian banks will be an exception,” Mundra said. “On a net-net basis, it would entail more provisioning and more capital requirement,” he added.
Separately, RBI has also initiated corrective action on few public sector banks which have failed to meet certain financial ratios. Restrictions have been placed on lending and branch expansion, steps which will help banks improve their capital efficiency. According to Mundra, smaller public sector banks should look at playing the role of niche banks and focus on nice businesses.
Mundra also had a word of caution for banks which are growing their retail book aggressively as corporate credit slows down. “Don’t do retail as fashion. Go for retail when you have proper preparedness, robust back office system, good analytics; only then,” he said. The central banker also cautioned about lending to sunrise sectors like e-commerce, citing past events when banks had to recall loans given to these firms. Mundra instead encouraged banks to handhold medium, small and micro enterprises as the sector is vital for job creation.
Mundra emphasized the need to change the regulatory and supervisory approach from being institutional-based to activity-based, in a context where greater convergence is happening between banking and non-banking activities with the help of mobile applications.