NPA for one bank to be NPA for rest too; rule to curb borrowing from one bank to repay another

MUMBAI: Failure to repay one bank could result in an account being classified as a bad loan by all banks, according to guidelines issued by the finance ministry early this month. The rule is aimed at discouraging companies from gaming the system by borrowing from one bank to repay another or to extract concession by skipping payments to one.

This marks the latest instance of a flurry of activity in which North Block, as the finance ministry is often referred to, has sometimes appeared to micro-manage banks.
"Since the counter-party for all lenders is the same, the status of the borrower across all lenders shall have to be same," the finance ministry said in a note to all PSU banks. "The move is aimed to prevent undue leverage in the hands of the borrower and will also incentivise early resolution of any irregularity with all the lenders," it added.

The finance ministry's directive comes at a time the sharp downturn in the economy has hit company cashflows, resulting in a spike in the quantum of bad loans in the books of banks. Gross bad debt rose 51% to Rs 1,03,891 crore for the year ended December 31, 2011, according to a reply to Parliament by Minister of State for Finance Namo Narain Meena.

In some cases, the finance ministry's activism has led to it getting into areas that have been the RBI's domain.

DISCIPLINING BORROWERS

The RBI, for instance, does not require all lenders to classify an account as a bad loan even if the borrower fails to repay one.

Some experts say such detailed instructions are legitimate as the government is the majority owner of most of the country's leading banks.

The instruction on bad loans is part of a wider proposal from the ministry asking all PSU banks to adopt a consortium-lending approach for loans above Rs 150 crore. Consortium lending refers to banks acting in concert, including sharing information about borrowers and ensuring that loan agreements are uniform.

The finance ministry issued a draft note in March asking banks to enter into a joint lending arrangement for debt above Rs 150 crore to inculcate financial discipline in borrowers.

In the final guidelines issued early this month, the ministry said all loans above Rs 150 crore to a single borrower should be brought under the ambit of a joint lending arrangement within six months, and the bank that has the largest share of the debt should lead the consortium.

In the same note, the ministry said pricing of the loan should be uniform among all member banks. "It will not be open to any member bank to waive the penal interest or vary the margin stipulated unilaterally."