Skip to main content

Exercise Caution While Giving Loans to Discoms: RBI to Banks

By
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

Comments

Post a Comment

Popular posts from this blog

RBI deputy governor cautions fintech platform lenders on privacy concerns during loan recovery

By
  India's digital lending infrastructure has made the loan sanctioning system online. Yet, loan recovery still needs a “feet on the street” approach, Swaminathan J, deputy governor of the Reserve Bank of India, said at a media event on Tuesday, September 2, according to news agency ANI.According to the ANI report, the deputy governor flagged that fintech operators in the digital lending segment are giving out loans to customers with poor credit profiles and later using aggressive recovery tactics.“While loan sanctioning and disbursement have become increasingly digital, effective collection and recovery still require a 'feet on the street' and empathetic approach. Many fintech platforms operate on a business model that involves extending small-value loans to customers often with poor credit profiles,” Swaminathan J said.   Fintech platforms' business models The central bank deputy governor highlighted that many fintech platforms' business models involve providing sm
Post a Comment
Read more

Credit card spending growth declines on RBI gaze, stress build-up

By
  Credit card spends have further slowed down to 16.6 per cent in the current financial year (FY25), following the Reserve Bank of India’s tightening of unsecured lending norms and rising delinquencies, and increased stress in the portfolio.Typically, during the festival season (September–December), credit card spends peak as several credit card-issuing banks offer discounts and cashbacks on e-commerce and other platforms. This is a reversal of trend in the past three financial years stretching to FY21 due to RBI’s restrictions.In the previous financial year (FY24), credit card spends rose by 27.8 per cent, but were low compared to FY23 which surged by 47.5 per cent. In FY22, the spending increased 54.1 per cent, according to data compiled by Macquarie Research.ICICI Bank recorded 4.4 per cent gross credit losses in its FY24 credit card portfolio as against 3.2 per cent year-on-year. SBI Cards’ credit losses in the segment stood at 7.4 per cent in FY24 and 6.2 per cent in FY23, the rep
Post a Comment
Read more

India can't rely on wealthy to drive growth: Ex-RBI Dy Guv Viral Acharya

By
  India can’t rely on wealthy individuals to drive growth and expect the overall economy to improve, Viral Acharya, former deputy governor of the Reserve Bank of India (RBI) said on Monday.Acharya, who is the C V Starr Professor of Economics in the Department of Finance at New York University’s Stern School of Business (NYU-Stern), said after the Covid-19 pandemic, rural consumption and investments have weakened.We can’t be pumping our growth through the rich and expect that the economy as a whole will do better,” he said while speaking at an event organised by Elara Capital here.f there has to be a trickle-down, it should have actually happened by now,” Acharya said, adding that when the rich keep getting wealthier and wealthier, they have a savings problem.   “The bank account keeps getting bigger, hence they look for financial assets to invest in. India is closed, so our money can't go outside India that easily. So, it has to chase the limited financial assets in the country and
Post a Comment
Read more