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RBI warns banks, FIs against investing in defaulting entities

BS Banking Bureau

The Reserve Bank of India has taken a tough stand on evergreening of loans by banks and financial institutions.

The central bank has issued a circular warning the financial entities to refrain from subscribing to debentures, bonds, and shares of defaulting companies/entities.

"It has been observed that some banks/FIs have not exercised the due precaution of referring to the lists of defaulters while investing in bonds, debentures, etc of companies," the RBI said.

Banks and FIs are, therefore, advised to exercise caution while taking any investment decision to subscribe to debentures, bonds, shares etc and refer to the "defaulters' lists" to ensure that investments are not made in companies and entities who are defaulters to the banks and FIs, it added.

This effectively closes all avenues of bank finance for companies, which find mention in the defaulters' list, based on lists supplied by individual banks and FIs, circulated once a year by the RBI.

According to observers, some of the banks and financial institutions, in a bid to prop up their loan accounts, have been evergreening their loans.

Some banks earlier used to sanction fresh loans--against issue of fresh debt paper-- to companies which had turned loan defaulters. The corporates then recycled this money to clear up their past dues, and everyone was better off.

However, after the RBI had taken a tough stand on this issue, some of the banks started subscribing to the bonds or debentures of these defaulters.

"This is a welcome step taken by the central bank. The RBI is trying to bring in international standards and close all possible avenues for evergreening of defaulter accounts. However, banks can still give guarantees to these companies," said a senior bank official.

Banks and notified financial institutions are required to report to the RBI -- at prescribed periodicity -- the particulars of borrowers with outstandings aggregating Rs 10 million and above (both funded and non-funded), classified as doubtful or loss, and borrowers against whom suits have been filed.

Moreover, banks and FIs are also required to report cases of wilful default of Rs 2.5 million and above on a quarterly basis. RBI circulates the information to banks and FIs for their confidential use.

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