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Exercise Caution While Giving Loans to Discoms: RBI to Banks

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The Reserve Bank of India (RBI) has cautioned banks from lending more to power distribution companies, or discoms. In a recent letter to select state-owned banks, the regulator has advised them to “exercise caution“ in giving new loans to these utilities, reminding them that “any additional exposure to discoms would result in ever-greening“ and “invite supervisory measure.“
RBI has also directed banks to categorise existing loans to discoms as non-performing assets, or bad loans, which attract provisioning.
The central bank's missive would add .Rs. 1.09 lakh crore to the already large po` ol of bad loans in the banking sector.As on December 2015, gross NPAs -quantum of bad loans prior to provisioning -of listed banks crossed Rs..4 lakh crore. Banks' total credit outstanding to discoms stands at . Rs.4.37 lakh crore exposure. In November 2015, the government had launched UDAY -Ujwal Discom Assurance Yojana scheme -to revive financially-ailing discoms. According to the scheme, 75% of the loan would be converted into bonds by end of March 2017, while the balance . Rs.1.09 crore would be treated as loans.
The interest return on the bonds and loans would be lowered to 0.1percentage point mark over base rates of respective banks, from 14-15%.
Since any concession to a distressed borrower -such as relaxing the repayment terms of loans and reduction in interest rates -is considered as `rest ructuring', the loan have be classified as NPA, as per RBI rules. Also, banks have to set aside 15% from their earnings as provisions. In the letter to bank chiefs, RBI has instructed them to provide for loans to discoms (that are not converted into bonds) by March 2017.
A back of the envelope calculation shows that the banking sector will have to provide around Rs. 16,000 crore -a direct hit on the bottom line -on account of loans to discoms.
For discoms, banks would have to resort to a somewhat unusual accounting treatment as a slice of the exposure (bonds) would be classified as `standard', or well-behaved assets, while the balance loans would be booked as NPAs.
Two senior bankers ET spoke to said the provisions would make a dent in their profits at a time when lenders are struggling to salvage huge amounts from corporate defaulters.Since respective state governments will takeover the discom bonds from banks, the latter would consider the securities as `held to maturity' on which mark-to-market losses are not booked.
The Economic Times New Delhi,12th May 2016

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