MUMBAI March 31 is around the corner, and all public and private sector banks are under the microscope of the Reserve Bank of India, banking circles revealed on Wednesday.
Quality Of Assets Under Review
Banks are too busy with the 2024-25 fiscal year-end tasks, especially with meticulous tracking of accounts and non-performing assets, identifying potential irregularities and fraudulent activities, and net worth concerns, to ensure the financial health of institutions, and depositors’ trust.
“The apex bank is closely monitoring banks’ liquidity mismatch, evergreening of loans, if any. The quality of banks’ assets (loans and advances) will be under the frequent review of RBI from the new fiscal year to ensure financial health and stability of the banking system.
“Banks with more liquidity mismatches experience more negative stock returns during crises, but more positive returns in non-crisis periods. Further, such banks experience more negative stock returns on events corresponding to a liquidity run, and more positive returns on events corresponding to government liquidity injection, and more importantly borrow more from the government during financial crises,” a well-known banker told The Free Press Journal.
Book capital is not an adequate indicator of a bank’s good health. The true net worth of a bank depends on the market value of the loans in its portfolio, which are generally difficult to value, owing to their illiquid nature.
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Evergreening Loans
In the event of “evergreening”, a bank will hide its real assets’ position and real interest income. In this process, a bank favours its borrower, who is failing to repay an existing loan, by offering a new loan to delay the classification of loans as NPAs or bad loans. This process, in effect, helps the borrower (often large loans) and the bank to hide the true financial health of both parties.
“Evergreening of loans will not only lead a bank to asset-deterioration but also create a false impression of its quality of assets and profitability. Evergreening is one of the major reasons that results in bad surprises, increased defaulters and bad loans,” he said.
Indeed, India has a few healthy banks that uphold the principles of transparency and accountability. Evergreening and the resultant asset manipulation and accounting lapse are unfair practices.
“RBI has a pivotal role in touching the lives of 1.4 billion people, and the apex bank does its best as India is on a mission to accomplish its dream of a more resilient–Viksit Bharat,” a retired banker said.
Book capital is not an adequate indicator of a bank’s good health. The true net worth of a bank depends on the market value of the loans in its portfolio, which are generally difficult to value, owing to their illiquid nature.
It’s therefore imperative to maintain the quality of loans. In India like countries, volatility makes these tasks even more difficult. Often, a bank is insolvent in market value terms long before its accounting capital is depleted.
It is relatively easy to adopt regulations such as capital adequacy ratios, it is much more difficult to carry out underlying procedures (such as measuring the value of capital) that give meaning to these regulations. As on December 31, 2024, commercial banks had more than two dozen classified borrowers (companies) aggregating to an outstanding of Rs 61,027 crore.
“The “evergreening” is not a new phenomenon in many markets, and still it remains a huge challenge for regulators around the world to detect discrepancies on time.
The banking system is sitting on NPAs and provisions of several lakhs of crores. But despite our sound supervisory environment, our banking sector has witnessed many bad surprises. In India, if the interest on a loan is in arrears by more than 90 days, prevailing accounting standards will forbid banks from showing that interest as already accrued in the income statement. |
Bad Surprises and of Bad Loans
Banks must have effective internal control, strong internal audit, competent senior management members such as CEOs, GMs and boards of directors, and promoters with sound track record. Overseas exposure of all institutions must be addressed,” the banker added. During 2023-24, until March 31, 2024, Indian banks had written off bad loans of Rs 1.7 lakh crore.
The banking system is sitting on NPAs and provisions of several lakhs of crores. But despite our sound supervisory environment, our banking sector has witnessed many bad surprises. In India, if the interest on a loan is in arrears by more than 90 days, prevailing accounting standards will forbid banks from showing that interest as already accrued in the income statement.
The Indian banking system had written off bad loans worth Rs 16 lakh crore in the last 10 years.
