Banks finding novel ways to conceal stressed loans: RBI governor

Evergreening of loans is a practice by which banks extend fresh loans to a borrower who is on the verge of a default, helping them repay old loans.

“To mention a few, such methods include bringing two lenders together to evergreen each other’s loans by sale and buyback of loans or debt instruments; good borrowers being persuaded to enter into structured deals with a stressed borrower to conceal the stress…" Das said at the Conference of Directors in the Boards of Banks, organized by RBI.

Ways to evergreen also include the use of internal or office accounts to adjust the borrower’s repayment obligations; renewal of loans or disbursement of new or additional loans to the stressed borrower or related entities close to the repayment date of the earlier loans.

Das said RBI has come across a few examples where one method of evergreening, after being pointed out by the regulator, was replaced by another.

“Such practices beg the question as to whose interest such smart methods serve. I have mentioned these instances to sensitize all of you to keep a watch on such practices," he added.

On banks’ business models, Das said boards must pay specific attention to asset liability management (ALM) of banks, as suboptimal ALM can lead to serious liquidity risks and destabilizing effects on the bank, as seen in the US recently. “Banks should exercise caution and prudence in their growth strategies, pricing of products and portfolio composition. Over-aggressive growth, under-pricing or over-pricing of products both on the credit and deposit sides, concentration or lack of adequate diversification in deposit or credit profile can expose the banks to higher risks and vulnerabilities," he said.

Das also expressed concern that gaps have been seen in the corporate governance of banks despite the regulator issuing guidelines. He said that it is the joint responsibility of the chairman of the board and the directors -- both whole-time as well as non-executive or part-time directors -- to ensure robust governance in banks.

The RBI governor said individual directors should not have any conflict of interest which may hamper their objectivity and independence. “It is the responsibility of the board to ensure that policies are in place to identify potential conflicts of interest and deal with them."

Das said the regulator has noticed gaps and material inaccuracies in the information being put up to the board. “It is the responsibility of the senior management to provide material information to the board in a timely, accurate and understandable manner so that the boards can take informed decisions," he said.

Care should be taken to avoid voluminous notes and information overwhelming directors with superfluous data, Das added.

PTI adds: He was quick to add that the Indian banking sector is “strong and stable" with capital buffers at 16.1%, gross non-performing assets at 4.41% and provision coverage ratio at 73.20% at the end of December 2022. “It is in times such as these that complacency may set in. We have to bear in mind that risks often get overlooked or forgotten when things are going well. Therefore, boards of directors of banks and their senior management should maintain a constant vigil on external risks and build-up of internal vulnerabilities, if any," he said.