Mumbai: The Reserve Bank of India (RBI) Governor Shaktikanta Das on Monday raised concerns over some banks using innovative methods for the evergreening of loans.
Speaking at a Conference of the Directors in the Boards of Banks, organised by the RBI for the private sector banks on Monday, the governor said during the supervisory process, certain instances of using innovative ways to conceal the real status of stressed loans have also come to the notice.
“To mention a few, such methods include bringing two lenders together to evergreen each other’s loans by sale and buyback of loans or debt instruments; good borrowers being persuaded to enter into structured deals with a stressed borrower to conceal the stress; use of Internal or Office accounts to adjust borrower’s repayment obligations; renewal of loans or disbursement of new/additional loans to the stressed borrower or related entities closer to the repayment date of the earlier loans,” Das said without naming any bank.
The RBI has come across cases where one method of evergreening, after being pointed out by the regulator, was replaced by another method, he said.
Evergreening of loans is a practice in which banks extend fresh loans to a borrower who is on the verge of default so as to help him repay old loans. If an account turns NPA, banks are required to make higher provisions which will impact their profitability. To avoid classifying a loan as a non-performing asset (NPAs), banks adopt the evergreening of loans.
“Such practices (evergreening of loans) beg the question as to whose interest such smart methods serve. I have mentioned these instances to sensitise all of you to keep a watch on such practices,” Das said in his address.
Stating that the business models of banks should be robust and prudent, Das said bank boards need to pay specific attention to the asset liability management (ALM) in the banks, as suboptimal ALM can lead to serious liquidity risks and destabilising effects on the bank itself.
“Over-aggressive growth, under-pricing or over-pricing of products both on the credit and deposit sides, concentration or lack of adequate diversification in deposit/credit profile can expose the banks to higher risks and vulnerabilities,” he said.
This is the second time in as many months that the RBI governor has spoken about the inappropriate business model adopted by some banks, which, if not corrected, can blow into a bigger crisis. In April, he said the RBI has started closely monitoring the business models of banks and financial institutions in the wake of the banking crisis in the United States and Europe.
In March this year, Union Finance Minister Nirmala Sitharaman also asked public sector banks to look at their business models closely to identify stress points, including concentration risks and adverse exposures. In the performance review meeting of the public sector lenders held in March, she urged the banks to frame detailed crisis management and communication strategies amid the global banking crisis.
The Governor said the RBI has engaged with certain banks on the need to make suitable adjustments in their business strategies where it was observed that over-aggressive growth in certain business segments, be it in credit or deposits side, were creating avoidable vulnerabilities.
He further said the RBI has also noticed gaps in the corporate governance of certain banks, which have the potential to cause some degree of volatility in the banking sector.
These gaps were seen despite the RBI issuing guidelines on the appointment of chairperson and conduct of meetings of the board; composition of important committees of the board; age, tenure, and remuneration of directors; and appointment of the whole time directors (WTDs), he said.
“While these gaps have been mitigated, it is necessary that Boards and the managements do not allow such gaps to creep in,” Das said, adding that it is the joint responsibility of the Chairman of the Board and the Directors, both whole time as well as non-executive or part time Directors, to ensure robust governance in banks.
He said individual directors on the board of banks should not have any conflict of interest which may hamper their objectivity and independence.
The directors should ensure that their loyalty is to the bank and no one else, he said.
Agencies