Bad Loans

Raghuram Rajan last year: 'Rajan slams banks for 'hiding' NPAs'(Non-Performing Assets) ""In India, too many large borrowers insist on their divine right to stay in control despite their unwillingness to put in new money. The firm and its many workers, as well as past bank loans, are the hostages in this game of chicken — the promoter threatens to run the enterprise into the ground unless the government, banks, and regulators make the concessions that are necessary to keep it alive," he said. The governor was delivering the Dr Verghese Kurien Memorial Lecture at IRMA, Anand on Tuesday.

The governor lashed out at banks for joining hands with borrowers in seeking relaxation in classifying some projects as "non-performing assets". "This is short-sighted, especially on the part of the banks. Today, the market does not distinguish much between non-performing loans and restructured loans, preferring to call them both stressed loans and discounting bank value accordingly," Rajan said."Some names from 3 years ago Dead beat corporate borrowers? Not in India Reuters, June 20, 2012:"Officially, 3 percent of loans in India are bad. Including restructured or "impaired" loans, for which banks don't have to set aside heavy provisions in case of default, the figure is about 7 percent, according to analysts.The reality is worse, say some bankers and industry experts, who say many loans are restructured outside official channels, with some banks and borrowers taking advantage of harder-to-track "evergreening" of loans to avoid declaring default. Under evergreening, banks provide additional loans to stressed borrowers, often indirectly, to enable them to repay existing loans. That can keep a loan from going sour, but it ratchets up a bank's exposure to a troubled credit.It's estimated that at least a tenth of loans to the real estate sector - where restructuring rules are stringent - are stressed, as against the 3-4 percent cited by banks, said Amit Goenka, head of capital markets at UK-based Knight Frank....................In the best-known recent example of a restructured loan turning sour, liquor baron Vijay Mallya's Kingfisher Airlines(KING.NS) defaulted to most banks on a $1.4 billion loan."Possible political links from First Post June 15 2015 by Adil Rustomji:"Basically, over half of the country’s infrastructure is built by firms from Andhra. Close to a third of the country’s power projects and half of its road construction projects are built by Andhra Infra. The leading lights among them are GMR, GVK, Lanco, IVRCL and KSK Energy. This is besides the whole host of smaller companies, including Gayatri, Madhucon, Navayuga, and Ramky.......First, the involvement and how it came to be. Ever since the Nagarjuna dam was built in the sixties, the predilection of Andhra businessmen for infrastructure was apparent. Aggressive risk taking and the ability to get things done also went with the ability to “manage the environment”. This is a wonderful euphemism for dealing with the hera pheri and “compromises” essential in any interaction with the bureaucracy and the government; and anything to do with infrastructure requires extensive interface of that sort.......How they got here is an interesting question. Sure, bad decisions were made and there was bad luck involved. But the eagerness of the public sector banking system to lend to them has yet to be explained. One answer may lie in the political economy of rent-seeking. In its second term, the Congress-led UPA was basically in an oxygen tent without the political numbers for survival. Yet the biggest constituent of the UPA came from Andhra Pradesh."A recent article by Mahesh Nayak Money from Junk June 15 describes some of the recent efforts through ARCs (Asset Reconstruction Companies):"Several factors are driving this flourishing trade in bad assets. But the biggest trigger came in November 2013 when Reserve Bank of India Governor Raghuram Rajan, in a strongly worded exhortation, asked the banking system to clean up its act. "You can put lipstick on a pig but it doesn't become a princess. So dressing up a loan and showing it as restructured and not provisioning for it when it stops paying, is an issue," he had said. Until then, scared to bell the cat, banks had been ever-greening their bad loans - and slipping deeper into the abyss. ....Under Rajan's stewardship, the RBI has announced a host of measures that have fuelled distressed asset sale business. Early last year, the central bank allowed th"e banks to sell even the loans where the principal or interest was overdue by 60 days rather than 90 days, earlier. In essence, it allowed banks to start selling assets early if they felt the loan was non-redeemable. Other factors are also responsible. ARCs are betting heavily on the proposed new bankruptcy law which will give them a greater leeway (including sale of whole or part of the company and change of management or promoter) to revive the distressed assets.