Monday, 17 February 2014

Stress Loans: Will banks be unwilling to give loans to 'fair' companies?

It is said that business is not done by 'self' investment but by 'borrowed' money from banks and individual investors. It is primarily banks & other financial institutions that extend lending facility as they are meant for this purpose. But they themselves are in a BUSINESS & business, of course, means profit.

In last two decades, as the Indian economy opened up, banks & other institutions helped in achieving GDP growth by extending facility to old & new business to expand further. Bust as it is said, every coin has two sides - positive & negative.

It is seen of late by published data that some seems to be taking undue advantage of this opportunity. This gets validated by many facts like when one hears that 'someone' did not pay back his loan. It becomes more serious when collateral are not worthy ensuring to recover loans given. If it is due to failure of business or due to other genuine reasons, perhaps it can be discounted but when, judicial system is misused to defer recovery or not at all to pay back dues, it is matter of concern. Unfortunately, such cases are not the exceptions, but regularly seen incidences. You may be surprised to know that approx 90% of defaulters, challenge the recovery proceedings in courts. Because of these reasons, there is a surge in bad debt. It is not only individuals but big corporates which have in a planned manner borrowed money from banks and defaulted, it seems.

Resultantly, NPAs (Non-performing Assets) of domestic banks has swollen to 3.6% at the financial year 2012-13. Current trends give all indication that it is increasing, further. Estimates are that 'bad' loans go to the tune of 7% of total loans & advances by March-15, as per report by RBI.

This estimation gets more roots from another fact. Of late, banks are flooded with CDRs (Corporate Debt Restructuring). If we look at CDRs, the amount recast by banks is increasing by leaps & bounds. It stands at 2.72 trillion at the end of Sept-13, up by 19% in July-13. By Sept-13, restructured loans stand at 6% of total advances - leading to rise in proportion of 'Stressed Loans' i e. gross NPA + CDR  to 10.2% of total advances by Sept-13.

By drawing attention to above facts, I want to make the point that the nuisances of liberalization can be seen in deliberate acts of some individuals or organisations.

The worrying point here is that good & fairs individuals or organisations which want to have access to easy money to build their businesses will be shooed away. For sure, the given experience will make banks more 'opaque' in extending such facilities. It can be seen on our face, when we see that banks are getting proactive in going after bad loans and deep 'intentional' checks before giving loans. Banks may start looking at initial stress in loans, debarring organisations from further debt.

The RBI guidelines issued recently is something on those lines. A discussion paper, the central bank, has released in Dec-13 where it has advised for early detection of financial stress. It suggested that if a loan is overdue by 30 days, it should be classified as a 'Special Mention Account' as against 90 days, currently.

Further, any increase in such cases wherein deliberate attempts are made by either individual borrower or organisation; it will make banks more stringent on giving loans. Perhaps more delay in sanctioning or disbursement of loans; leading to non-availability of funds for real business reasons.

These changes will drastically impact business environment in the country, already which is in stress due to policy paralysis.  Let, such things do not occur in our country, enabling its citizen better living.


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  2. Very true sir. Observed something similar myself. My previous car loan was done without any hassle but when even after clearing the same approached the bank for a new one, I have to face the stress.

    Lots of preliminary checks, stringent guilines, tons of paper work and what not.

  3. Thanks Sachin for your comments. You are right. Getting a loan may become tough, as banks may try checking every possible fact to ensure loan recovery. Applicable for both individual or organisation.