Private banks continue to hide substantial bad debts: RBI audit

Private sector banks continue to hide a large chunk of stressed assets. There is a huge mismatch between the Reserve Bank of India (RBI) estimation and respective private bank’s own estimation of stressed assets as the private banks under report the non-performing assets (NPAs) figures. This has come to the light during the ongoing audit by the central bank.

On April 18, the RBI introduced new rules that mandate banks to disclose the bad debt numbers, if the divergence between the central bank’s assessment and the bank’s actual assessment is more than 15 per cent. The development came following the RBI was empowered by the government to speed up the recovery of bad loans.

According to reports, the RBI estimates that Yes Bank has Rs 4,930 crore of bad loans for the financial year 2015-16, while the bank has reported the bad loan figures for the same financial year at 750 crore. In percentage terms, while the central bank has estimated the total gross NPAs of Yes Bank for the fiscal year 2015-16 at 5 per cent, the bank, however, has pegged it at 0.76 per cent.

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Under-reporting of bad loan numbers is not a phenomenon restricted to YES Bank only. According to foreign brokerage firm Credit Suisse, the gross NPAs of Axis Bank were 4.5 per cent in 2015-16 against the bank’s own estimation of 1.78 per cent. Similarly, the NPA numbers of ICICI bank stood at 7 per cent against 5.85 per cent reported by the bank, the Credit Suisse report states.

The RBI has invoked Prompt Corrective Action (PCA) framework on IDBI Bank Ltd because of its rising bad loans and negative return on assets. Under PCA, banks are assessed on capital ratios, asset quality and profitability. Failure to meet any of the norms can invite action by the RBI.

The total NPAs of IDBI Bank, in the eight quarters till December 2016, stood at a whopping Rs35,245 crore.

The IDBI Bank has two consecutive years of negative return on assets. The bank has reported a loss of Rs3,664.80 crore in FY16 and Rs 1,958 crore loss for the nine months till December in FY17.

“Given these large divergences, the FY17 RBI audit results will be keenly awaited and the narrowing of these divergences will be key for contraction in their valuation gap to the private consumer banks,” Credit Suisse said in a report.

According to available data, private sector banks have been jostling with stressed assets of a staggering Rs 10 lakh crore as of December-end. Similarly, the stressed assets of public sector banks have also reached a whopping Rs 6.07 lakh crore till December end.

The Union Cabinet, on 3 May, had approved promulgation of an Ordinance to amend the Banking Regulation Act, which gives wide ranging powers to the RBI to initiate insolvency proceedings for the recovery of bad loans.

The much-awaited Ordinance was promulgated by President Pranab Mukherjee on 4 May. The Ordinance, which amends section 35A of the Banking Regulation Act, 1949, will be placed in the floor of the Parliament during the upcoming Monsoon Session.

The Ordinance authorises the “Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default under the provisions of the Insolvency and Bankruptcy Code (IBC), 2016”.

The RBI has been equipped with powers to specify one or more authorities to advise banks for dealing with the problem of NPAs.

The development assumes significance at a time wilful defaulter Vijay Mallya is in his safe haven in London after siphoning up over Rs 9,000 crore of loan taken from different banks in India over a period 11 years.

The NDA government has inherited a legacy of bad loans from the UPA dispensation. Since 2014, the Union Finance Ministry and the RBI have been drawing up strategy for the recovery bad loans.

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