A year of disruptions for the banking sector

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The year 2018 has been one of disruption for the banking industry. A tough loan default classification rule by the Reserve Bank of India (RBI), the out-of-the-blue IL&FS (Infrastructure Leasing and Financial Services) imbroglio and the spat between the government and the central bank have combined to make 2018 a year that the banking and financial services industry would like to quickly consign to the pages of history and move forward for good.

RBI’s decision in February requiring banks to classify even a day’s delay in the payment of loan dues as default and report the same to the central bank set the stage for the industry to traverse a difficult road ahead. The move elicited strong reactions from the corporate world.

Not surprisingly, banks saw a sharp rise in accounts classified in the first bucket of special mention accounts (SMA-0). An account is identified as an SMA-0 account if the payment is delayed even by one day. Reporting such accounts to the Central Repository for Information on Large Credits on a weekly basis becomes mandatory for accounts where outstanding loans are more than ₹5 crore. For cases where the exposure goes beyond ₹2,000 crore, banks are expected to initiate rectification or restructuring procedures immediately.

Banks have 180 days to complete this restructuring before they refer the account for insolvency proceedings. Predictably, banks and others alike raised ‘reputational risks’ involved in the rule with cascading consequences for future borrowings. Earlier, accounts overdue by 90 days were classified as NPAs (non-performing assets).

Bankers would typically start following up on overdue payments only close to the 90-day mark so as to prevent an account being tagged as NPA.

Point of friction

“A default is a default,” argued a top banker with a private lender. For him, the tendency to push repayment beyond the due date is an unhealthy practice allowed for long. The rule is turning out to be a huge friction point between the RBI and the rest.

The fact of the matter, however, is that this rule has indeed managed to force defaulters in the corporate world to rush in to pay up. If the RBI is painted as a villain here, post-IL&FS episode has seen banks take up the role. Money has become scarce for many a finance company, placing in peril a host of small and medium enterprises. The IL&FS story is a reiteration of the need for a well-oiled long-term debt market. Time and again, one keeps hearing on the requirement for a well-developed debt market. This remains a dream even today with many former development finance institutions converting themselves into commercial banks.

The IL&FS payment default is a warning signal for quick action on the long-term debt finance front.

As though these weren’t enough, came the open fracas between the government and the central bank. This has seen the government demanding its right to enforce its will on the central bank and the RBI stoutly defending its known stand vis-a-vis sharing its reserves and accommodating the government on other issues.

A Governor who was reticent and non-communicative and his belligerent deputies had only managed to push the central bank into an avoidable collision course with a government that had sought to play by the rule book to assert its authority. In the end, Urjit Patel had to quit, citing personal reasons though. “A quitter never wins” as Sunil Gavaskar, former captain of the Indian cricket team, said in his autobiography. From hindsight, it could be argued that Dr. Patel had done a singular disservice by throwing in the towel.

Occupants of top slots in institutions such as these are expected to be strong-willed and focused in the face of pressures from within and outside. But the episode has harmed the image all round and the collateral damage has been huge. It will take a while for normality to return. As 2018 nears its end, the new year will be well served if lessons are learnt from immediate history.

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