oppn parties New Lending Norms Will Bring Transparency & Reduce NPA's

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  • Bengal starts paying MNREGA workers out of own funds as Central disbursement is stopped due to alleged 'discrepancies' in accounts
  • ISC chemistry paper postponed to March 21 just hours before start of exam due to "unforeseen circumstances"
  • Ghajal legend Pankaj Udhas passes away. he was 72
  • Calcutta HC says that there is no stay on arresting TMC leader Shahjahan and he should be arrested immediately
  • With latest data showing big fall in consumption of food and cereal, the government might rejig retail inflation data
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  • Paytm founder Vijay Shekhar Sharma steps down as chairman of Paytm Payments Bank
  • Rohit Sharma says only players with hunger to perform in Tests will be given chances, issuing a stern warning for those who play truant
  • Fourth Test: Shubman Gill (52 no) and Dhruv Jurel (39no) take India home after they slumped to 120/5
  • Fourth Test: India win by 5 wickets to claim series 3-1 with one Test remaining
  • UK writer Prof Nitasha Kaul, who was invited by the Congress government in Karnataka for the international conferecne on the Constitution, was detained and deported upon her arrival at Bengaluru airport
  • Haryana INLD chief Nafe Singh Rathee was shot dead in Bahadurgarh in the state after his car was ambushed and sprayed with bullets by suspected gangsters
  • After the Congress left late Ahmad Patel's fief Bharuch in Gujarat for the AAP, his son Faisal Patel has revolted and said that he will contest from the seat
  • BSP implodes as MP Ritesh Pandey joins BJP with 3 more MPS eyeing a switch to the BJP, 2 looking to join the Congress and 1 RLD
  • PM Modi inaugurates Sudarshan Setu, a 2.3km long cable-strayed bridge that connects Okha on the mainland to Beyt Dwarka island in the Arabian Sea off Gujarat coast
India win the Ranchi Test by 5 wickets, take an unbeatable 3-1 lead in the five-match series
oppn parties
New Lending Norms Will Bring Transparency & Reduce NPA's

By Sunil Garodia
First publised on 2016-08-30 13:50:52

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator.
RBI tightens lending norms for banks
The Reserve Bank of India (RBI) has tightened corporate lending norms. It has announced two measures last week that may raise the cost of lending but will protect banks from NPA’s. In the first measure, banks will have to make higher provisions for lending beyond the prudent norms set by the RBI. In doing so, they will have to block more capital. They will also have to report why they exceeded the exposure limit. “Group entities” have been clearly defined and formats have been prescribed to calculate the exposure to a particular group. This will make it difficult for banks, as well as companies, to fudge data.

Qualitative criteria to identify “group entities”
In the second measure, qualitative criteria have been tagged with quantitative to ensure that risk exposure is not exceeded in a circuitous way. While calculating this, banks would have to look beyond the face value of the figures to examine whether two entities are so economically dependent on each other as to be considered “group entities.” It will make it tough for over leveraged groups to obfuscate data and take loans in excess of what is prudently available for them.

Non-rated borrowers will get loans at higher cost
Then, the RBI has also asked banks to assign a higher risk weightage to non-rated borrowers. If exposure to non-rated borrowers is more than Rs 200 cr, banks will need to assign higher risk weightage to such borrowers. This will increase the cost of borrowing for them, which in turn will act as an incentive for them to get rated. This measure will also have to be applied in case of companies that were rated but have lost the rating.

Financial health of company the new barometer
These lending norms taken together will dynamically change the way banks lend money. They will bring transparency and bribing senior bank officials to get loans cleared will no longer work. In the past, companies like Bhushan Steel were accused of having bribed the former MD of Syndicate Bank to get loans worth crores despite not having their financial data in order. If these measures were in place earlier, Vijay Mallya would not have managed to fool the banks with a labyrinth of companies. The best thing about these measures is that they will create a level playing field and instead of the borrower’s pedigree or connections, the financial health of his company will be the barometer in providing banking loans. They will also ensure that discretionary powers of bankers will be curtailed and NPA’s will gradually go down. But all this will only happen if governments do not force the banks to relax norms in lending to politically sensitive sectors, like infrastructure, where future policy changes might encourage defaults.