Banks have to put in place proper risk-pricing mechanism,
especially for funding long-gestation infra projects, if they want to prevent
an encore of the present bad loan pile-up, Reserve Bank deputy governor NS
Vishwanathan has said.
Banks are saddled with over Rs 10 trillion bad loans in the
system, most of them in infrastructure sectors like power, steel and road
projects, forcing the RBI to list as many 40 largest NPA accounts, which
constitute 40 per cent of the mess, to be referred to the national debt
tribunals for recovery and resolution in 2017.
He said in many instances risk is underpriced so as to
demonstrate that a project would be sustainable, and hence would be good to
finance.
"It would be safe to assume that had proper risk
pricing been done, many of the current NPAs could have properly assessed very
well,in advance," Vishwanathan told a credit markets conclave organised by
Care Ratings today.
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The gross non-performing assets of banks rose by 18.5 per
cent on an annualised basis in the September quarter to 0ver 10.2 per cent system
wide or a little over Rs 10 trillion in absolute terms. And the regulator has
projected it would cross 10.8 per cent by this March.
The deputy governor said once a creditor has decided to
sanction a loan to a potential debtor, the next step for them is to arrive at a
risk-adjusted pricing, and this is one area where banks needs to upgrade their
skills.
"Risk-based loan pricing would need fair assessment and
understanding of the risks involved rather than merely relying on collateral
and/or guarantees obtained from stakeholders, including equity holders,"
Vishwanathan said.
Banks should charge interest commensurate with the risks
involved in the project that is being financed, he said.
Proper risk pricing will involves sophisticated assessment
of risks and banks should be mindful of the stage of the business cycle in
which the borrowers are in at any given point of time.
"Risk-based pricing will always help the banks to build
buffers that could act as cushions in case of certain projects turn bad,"
he said.
Vishwanathan said an important aspect of the loan is the
covenants that include the terms and conditions of the project in the loan
agreement.
He said banks should continuously monitor pre- specified
trigger point in loan covenants to identify and rectify, if possible, early
stress.
"It should be kept in mind that as the stress persists
in an asset the expected value of recovery also diminishes. Therefore, this
brings us to the need to act early when first sign of stress occurs in an
asset," he noted.
The deputy governor said in the Insolvency and Bankruptcy
Code, the possibility of equity holders losing an entity should result in both
stakeholders--creditors as well as debtor, to work towards resolution that is
best for them.
Therefore, coordination mechanisms among banks, through
institutional platform like joint lending forum (JLF) must ideally be deployed
before the account is classified as special mention account (SMA).
"We have mandated JLF when the account is in SMA 2. I
would rather suggest that moment the default happens, even a day or two, banks
should start getting alert," he said.
He said loan covenants need to be strengthened to deter the
management of borrowers to take action to maximise their profits even it means
at the expense of creditors.
Banks's boards have to play a major role in enforcing the
loan covenants through proper drafting of policies that would guide the man in
charge and require to embolden the staff to take the decisions.
Lenders must protect their interest by writing strong
covenants, strictly enforcing the covenants, properly pricing of risk and
reacting to early warning signals about incipient stress that is building up,
he said, adding "all this should be embedded into the credit culture of
banks.
