Mumbai, April 6, 2017

There is no ban on giving loans, but it would cost higher provisions for the bank

 Effective April 1, banks have to set aside higher provisions for loans given to highly indebted companies, the system-wide limit for which is set at Rs 25,000 crore for the financial year 2017-18.

Banks are not comfortable with this move, and some of them have asked the Reserve Bank of India (RBI) to go easy on the provisioning part.

The limit of indebtedness comes down to Rs 15,000 crore from 2018-19, and then Rs 10,000 crore from April 2019 onwards. Beyond these limits, the RBI wants banks to invest in debt instruments issued by the companies, rather than giving them loans directly.

But, under the International Financial Reporting Standards (IFRS) norms, banks won’t get any relief on any kind of exposure to indebted companies, be it loans or investing in their bonds. Banks, therefore, have requested the RBI to give them more time, even as they welcome the idea of letting the companies tap the bond market.

“For stressed companies, banks are anyway incurring heavy provisioning. And we are not able to reduce our exposure on any of these companies for a long time. Now is not a good time to impose such restrictions. We need more time,” said a senior bank executive with a public sector bank who did not wish to be named.

There is no ban on giving loans, but it would cost higher provisions for the bank. For example, if a company, which has already borrowed Rs 25,000 crore from all banks and financial institutions, as well as from the market, asks for further loans, the bank or banks who extend the loan will have to set aside three per cent more provisions and increase the risk weight by 75 basis points.

According to bankers, what in reality will happen is that banks would be increasing the cost for the clients. Many of these companies, then, will be forced to find the bond route for funding, but not all would be successful considering the limited demand for bonds issued by companies rated lower than AA. So banks will have to chip in to buy these bonds.

Whatever the banks cannot give in loans can be given through bonds issued by the companies, which escape such steep provisioning. In fact, the idea behind the August 2016 guidelines is to push the companies to the bond market. But bankers say that there should be a ready market first.

Other experts also agree on that assessment.

“It is unrealistic to assume that in the present form, lower rated firms or projects can access the bond market and reduce their dependence on the banking sector,” said Naresh Takkar, managing director and group CEO of Icra Ltd.

To be sure, companies with such heavy debt are only a handful, but in three years, companies with Rs 10,000 crore exposure would be substantial enough to impact the banks adversely.

An analysis of listed BSE 500 companies shows there were only 10 companies that had bank loans of above Rs 25,000 crore as on March 2016, with a collective exposure of Rs 3.84 lakh crore.  

However, there were 32 companies that had bank exposure of at least Rs 10,000 crore as on March 2016, with a secured and unsecured loan exposure of Rs 7.28 lakh crore or roughly 10 per cent of total bank loans.

[The Business Standard]