We haven’t seen the last of bad loan divergences
The disclosures of three private sector banks out of the 41 listed lenders would have you believe that the Rs9 trillion of bad loans that the lenders had piled up as of March is just the tip of the iceberg and that the banking regulator, the Reserve Bank of India (RBI), has asked lenders to disclose the entire mess.
But differences between the statutory audit of bank books by auditing firms and the central bank have existed historically. It all boils down to different sample sizes (RBI inspection and audits do not dig into each account), and is highly discretionary in nature.
A question that arises is why RBI pushed banks to disclose the divergences now. One answer could be the extent of divergence has now reached proportions beyond the regulator’s comfort zone. Public sector banks saddled with the maximum bad loans are yet to report the extent of the divergences between their auditor’s estimates and RBI’s. Clearly, the banking regulator was unsettled by the rise and thought it wise to bring divergences to the notice of the public.
Perhaps RBI, left with the NPA (non-performing asset) mess on its door, decided to put the onus of punishment on the markets rather than penalize the banks itself. But that is no solution.
RBI has far-reaching powers under the Banking Regulations Act to penalize a bank and even fire the bank management if it is satisfied that the bank’s lending transactions are detrimental to either depositors’ interest or banking policy. But steps such as these could lead to an erosion of faith in these banks.
Also, a penal action cannot single out a lender as every other bank is saddled with stressed loans. This is reason enough for RBI to wear the hat of a negotiator rather than the jury in this bad loan resolution process.
While the central bank huddles with stakeholders to find a solution, it is worth asking whether divergences will recur. The current reported divergences are of fiscal year 2016 (FY16) and all the lenders have said that these divergences have been fully accounted for in FY17.
Note that these divergences occurred because RBI felt more accounts needed to be classified as bad than it thought before because borrowers couldn’t complete asset sales and economic conditions didn’t improve. Resolution of bad loans has not accelerated, the outlook on recoveries hasn’t turned sanguine and fire sale of assets by companies is still fraught with issues. Trouble is piling up in the stressed telecom sector. Chances are that these divergences will continue.