Home / Industry / Banking /  RBI tells banks to make extra provisions for earlier defaults

MUMBAI : The Reserve Bank of India has identified a set of loan accounts, including companies owned by the state governments which defaulted on repayments between FY20 and FY22, and has asked banks to make provisions against them retrospectively, two bankers in the know said. The regulator recently conducted an inspection for FY22 and insisted that the banks set aside 20% of outstanding loans taken by the entities as provisions. RBI pulled up banks for not following a 7 June 2019 circular on the resolution of stressed assets, which mandated lenders to review loan accounts within 30 days of default.

Bankers said public sector undertakings, at times, fail to repay within the deadlines, but such instances are temporary and do not last for more than a week or so. RBI has, however, questioned why the banks did not use the June 2019 circular to review the loan accounts, they said. State PSUs named by RBI were from Andhra Pradesh, Telangana and Odisha. An email query to a spokesperson of the RBI remained unanswered till press time.

“These loans are in the standard category and are being repaid on time, but we were told to provide more owing to past defaults. We tend to give some leeway to PSUs because they are government entities and are unlikely to face severe repayment stress," said one of the two bankers cited above. The borrowers have large outstanding loans and a 20% provision will require them to set aside a lump sum, he added. Banks typically provide 0.25-2% on non-restructured standard loans as provisions, depending on the loan category. RBI’s new diktat comes at a time when asset quality stress is relatively benign, and banks seem to have got a grip on it. On 21 September, Crisil Ratings said banks’ gross non-performing assets are expected to improve by 90 bps year-on-year to about 5% this fiscal year and by another 100 basis points to a decadal low of 4% by 31 March 2024.

According to bankers, RBI took a strict view on exposure to certain state government-owned entities. In June, RBI said banks were violating its guidelines while lending to state PSUs, especially for infrastructure and housing projects. The second banker, however, said many lenders have already complied with the 14 June circular.

Mint reported on 20 July that the issue stems from off balance sheet borrowings by state governments. These are loans raised by state government entities and special purpose vehicles, supported by guarantees of the respective state. Banks were found to be lending large sums to some state government entities, despite the fact that these borrowers did not have any cash flows from where the loans would be repaid.

“Some banks have already received the inspection report, while others are still waiting their turn," said one of the bankers quoted above.

Meanwhile, the June 2019 circular, the basis of RBI’s recent action against some banks has cautioned that any deviation would attract higher provisions and even penalties. “Any action by lenders with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory or enforcement actions as deemed appropriate by the Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary penalties," it had said.

In June 2019, RBI had directed banks to put in place board-approved policies for resolution of stressed assets, including the timelines for resolution. In fact, it had said lenders were expected to initiate the process of implementing a resolution plan even before a default since default is a lagging indicator of financial stress.


Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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