RBI blames banks for lending to borrowers with 'little skin in game' leading to high NPAs

MUMBAI: The Reserve Bank of India (RBI) has blamed banks for giving huge loans to borrowers who have contributed very little capital to their business leading to surge in bad loans. Further the banking regulator has also said that public sector banks' poor credit appraisal skills also contributed to the rise in non-performing assets. "One possible inference from the observation in this context could be that banks have extended disproportionately high levels of credit to corporate entities and promoters who had much less 'skin in the game during the boom period," said the RBI in bi-annual report released by the RBI on Financial Stability.

In fact as per the rules laid out by the RBI itself, loans restructured that were under the corporate debt restructuring forum, borrowers were required to infuse as little as 2% of the restructured loan amount while banks had to extend the tenure of the loan and write off a part of loans as a part of restructuring.

The banking regulated noted adverse economic conditions and other factors related to certain specific sectors too played a key role in asset quality deterioration. The regulators said that under severe stress scenario the bad loans of could surge to 6.9% from 5.1% in September 2015.

It said bank-wise trends in the sector-wise concentration of loans and NPAs shows 'weak systems of credit appraisal and monitoring in the case of the PSBs in their asset quality deterioration'.

The report says that 'the pressure on asset quality continues to be the biggest impediment in improving the performance of banks, especially the public sector banks, which needs to be tackled head-on to ensure that bank credit growth is not allowed to settle at a level lower than what is considered optimum.'