'NPA-hit banks turn to evergreening of books'
28 AUG, 2012, 03.10AM IST, SANGITA MEHTA,ET BUREAU(From The newspaper Economic Times )
MUMBAI: The pressure of rising bad debts is promptingbanks to find innovative ways to disguise stress loans - a move which could impact banks' balance sheet if theeconomy does not revive in short-term.
In a report by Nirmal Bang Equities, a broking firm says, "Banks have resorted to innovative techniques of effectively restructuring stressed corporate standard loans which are not disclosed as restructured standard loans, but are impaired loans. Such a practice makes their asset quality appear deceptively healthy even though it has deteriorated."
Traditionally it is referred as 'evergreening of loans' wherein banks provided additional loans to corporates who were unable to repay on time. In past, ReserveBank of India has come down heavily on such practices while inspecting banks' books.
According to the report authored by Hemindra Hazari, head of research, banks through their overseas offices provide additional funding to distress companies with overseas operations to regularise domestic accounts. For those who do not have overseas operations, banks have entered into an arrangement with financecompany to provide liquidity support to companies in stress.
"Evergreening continues to take place. At times it is at the instance of banks themselves who are keen to save the account from becoming an NPA. Banks should restructure the account to resolve the problem instead of finding a near term solutions such as evergreening," said TR Madhavan executive chairman of Centrum group which advises companies on loan syndication and restructuring.
The report says that select Indian companies had inflated the cost of acquisition of foreign entities and the banks financed these inflated acquisitions without any vigorous scrutiny. Following the slowdown many companies rushed to recast their loans. "Banks which had overseas branches resorted to funding their stressed domestic corporate accounts through these branches; domestic rupee loans were replaced by loans from foreign branches as these companies used foreign subsidiaries to transfer their assets to these entities so as to receive the required funding from overseas branches of Indian banks. Such practices kept banks' stressed corporate asset exposure as "standard" without any disclosure as a restructured standard asset," the report said. A number of banks like Axis Bank, Bank of Baroda and Bank of India saw high growth in loan disbursal by their overseas branches while Canara Bank and Punjab National Bank have shown growth from a low base
The report also said that there existed a cosy relationship between banks, stressed corporates and NBFCs. "Stressed corporates found it difficult to service bank loans and the banks did not classify such loans as restructured or NPAs, but instead the banks made arrangements with certain NBFCs whereby the NBFCs extended finance to stressed companies, which was used to service bank loans and the banks compensated NBFCs and further provided assurance to the NBFCs from any losses. This scheme has been helpful for stressed corporates that lacked foreign presence and were unable to create foreign subsidiaries and shell companies through which they could get funds from banks' overseas branches."
None of the bank chiefs ET spoke to were willing to speak on the issue. "Evergreening is happening probably by every regulated lender. Today every lender is under pressure, either from its stakeholder or peers, to show lower NPA numbers, which is why they are indulging in some sort of evergreening of loans," said a senior bank officer on condition of anonymity. The RBI data show that restructured loans rose to Rs 2.18 lakh crore in March 2012, up 60% over previous year. Also, in the same period, share of restructured loans rose to 4.68% of total loans against 3.45% a year ago.
"There is a gray area between restructuring of loans and evergreening of loans. While providing additional funding to a stressed borrower banks need to evaluate whether the borrower is merely facing a liquidity crunch or whether the viability is seriously impaired. Liquidity support, even when an account is classified as NPA, is definitely called for. But when viability is questionable, mere liquidity infusion is like avoiding short term pain. This is a classic case of good money being thrown over bad money!," said Sharad Bhatia, CEO of Phoenix ARC which is promoted by Kotak Mahindra Bank.
The report says that if the economy rebounds or recovers in the short-term and the stressed companies' performance improves, it will not pose a problem for the banking industry apart from understating their immediate NPAs and restructured standard loans.