oppn parties New Lending Norms Will Bring Transparency & Reduce NPA's

News Snippets

  • Amit Shah says the government will identify and deport illegal immigrants from all parts of the country
  • Reports from Pakistan confirm that Hafiz Saeed has been arrested and sent to jail
  • After the SC order, Karnataka Speaker says he will go by the Constitution in deciding on the resignations of the 16 MLAs
  • Rebel MLAs say they will not attend the trust vote on Thursday
  • Supreme Court rules that rebel MLAs cannot be forced to attend the assembly and vote in the floor test
  • Both the Centre and the Assam government have sought re-verification of up to 20% of draft NRC data
  • Pakistan opens its airspace for Indian planes
  • Dilapidated building collapses in Mumbai, killing more than 10 people while many were still trapped
  • Kulbhushan Jadhav case verdict to be delivered today by the ICJ
  • A Vistara flight landed in Lucknow with just 5 to 10 minutes of fuel left in the tank
  • Supreme Court to decide on Karnataka MLAs plea today
  • Karnataka alliance to face floor test on Thursday
  • China says that the next Dalai Lama will be appointed by it
  • Pakistan assures India that no anti-India activity would be allowed in the Kartarpur corridor
  • Pakistan to allow visa-free access to 5000 pilgrims every day to undertake pilgrimage using the Kartarpur corridor
ISRO calls-off Chandrayaan-2 mission launch at last moment due to technical snags. revised date will be announced later
oppn parties
New Lending Norms Will Bring Transparency & Reduce NPA's

By Sunil Garodia

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator. Writes for a number of publications.
RBI tightens lending norms for banks
The Reserve Bank of India (RBI) has tightened corporate lending norms. It has announced two measures last week that may raise the cost of lending but will protect banks from NPA’s. In the first measure, banks will have to make higher provisions for lending beyond the prudent norms set by the RBI. In doing so, they will have to block more capital. They will also have to report why they exceeded the exposure limit. “Group entities” have been clearly defined and formats have been prescribed to calculate the exposure to a particular group. This will make it difficult for banks, as well as companies, to fudge data.

Qualitative criteria to identify “group entities”
In the second measure, qualitative criteria have been tagged with quantitative to ensure that risk exposure is not exceeded in a circuitous way. While calculating this, banks would have to look beyond the face value of the figures to examine whether two entities are so economically dependent on each other as to be considered “group entities.” It will make it tough for over leveraged groups to obfuscate data and take loans in excess of what is prudently available for them.

Non-rated borrowers will get loans at higher cost
Then, the RBI has also asked banks to assign a higher risk weightage to non-rated borrowers. If exposure to non-rated borrowers is more than Rs 200 cr, banks will need to assign higher risk weightage to such borrowers. This will increase the cost of borrowing for them, which in turn will act as an incentive for them to get rated. This measure will also have to be applied in case of companies that were rated but have lost the rating.

Financial health of company the new barometer
These lending norms taken together will dynamically change the way banks lend money. They will bring transparency and bribing senior bank officials to get loans cleared will no longer work. In the past, companies like Bhushan Steel were accused of having bribed the former MD of Syndicate Bank to get loans worth crores despite not having their financial data in order. If these measures were in place earlier, Vijay Mallya would not have managed to fool the banks with a labyrinth of companies. The best thing about these measures is that they will create a level playing field and instead of the borrower’s pedigree or connections, the financial health of his company will be the barometer in providing banking loans. They will also ensure that discretionary powers of bankers will be curtailed and NPA’s will gradually go down. But all this will only happen if governments do not force the banks to relax norms in lending to politically sensitive sectors, like infrastructure, where future policy changes might encourage defaults.