Overall asset restructuring in the banking system, which touched Rs 3.25 lakh crore as of June, has gone “out of control”, according to RBI Executive Director B. Mahapatra.
“Till March 2010-11, things were manageable at around Rs 1.10 lakh crore, but now if you see, things are quite out of control. It has gone up to Rs 2.70 lakh crore.
“This is only CDR (corporate debt restructuring), and if you put both (CDR and bilateral restructuring cases between banks and companies) together, it might exceed Rs 3.25 lakh crore,” Mahapatra said, who was chairing a panel discussion at the annual banking conference Bancon 2013 on Saturday.
A bank agrees to restructuring when a loan is under stress, and a default is feared. Under restructuring, banks typically increase the repayment period of loans to stressed borrowers, offer a moratorium and reduce lending rates.
All stakeholders need to tackle the problem jointly, said Mahapatra. “We'll tolerate a bit of restructuring. We will give the regulatory forbearance, offer more time.’’
Hinting that the initiative may come with a rider, the central banker said: “Incentivising is if you go for an early recognition of NPAs (non-performing assets) and early resolution of the problem.”
At present, a loan is considered to be an NPA if its instalment is not paid for three months or 90 days.
“Before 90 days, you know the trend. We are still working on it, nothing is finalised,” Mahapatra added.
On Friday, RBI Governor Raghuram Rajan had said the central bank would announce steps to incentivise early recognition, better resolution and fair recovery of distressed loans. Mahapatra also expressed concern over the falling provision coverage ratio of the banking system, saying it has, on an average, slipped in three years to 45 per cent from over 55 per cent.
Provision coverage ratio is essentially the ratio of provisioning to gross NPA and indicates the extent of funds a bank has kept aside to cover loan losses.
“There's no level per se… Around 50-60 (per cent) is ok (excluding provisions towards standard assets). It depends on the collateral… if the collateral is high quality, you don't need high provisions,” Mahapatra said. Deputy Governor K. C. Chakrabarty said that globally, the provision coverage ratio is 70-80 per cent.