RBI Governor Warns Private Banks Against Smart Methods To Hide NPAs
Shaktikanta Das frowns at banks concealing bad assets, evergreening of loans.
Reserve Bank of India Governor Shaktikanta Das told private bank directors to ensure strict corporate governance and warned them against hiding soured loans.
In a closed-door meeting between the RBI’s top brass and directors on boards of all private banks in India on Monday, Das said that corporate governance lapses were found at banks.
The transcript of the speech by Das was released on the regulator’s website.
“It is ... a matter of concern that despite these guidelines on corporate governance, we have come across gaps in governance of certain banks, with the potential to cause some degree of volatility in the banking sector,” the RBI Governor said.
Speaking about some innovative ways in which banks hide the true status of stressed accounts, Das said such practices beg the question as to whose interest such smart methods serve.
Das cited examples of such methods:
Bringing two lenders together to evergreen each other’s loans by sale and buyback of loans or debt instruments.
Good borrowers being persuaded to enter into structured deals with a stressed borrower to conceal the stress.
Use of internal or office accounts to adjust borrower's repayment obligations.
Renewal of loans or disbursement of new/additional loans to the stressed borrower or related entities closer to the repayment date of the earlier loans.
“We have also come across a few examples where one method of evergreening, after being pointed out by the regulator, was replaced by another method,” Das said.
The RBI Governor also said that there was a need for independent directors to maintain their "independence". The board is also required to ask tough questions to the management and ensure robust corporate governance.
“…we have noticed the dominance of CEOs in board discussions and decision-making. It has been seen in such cases that boards are not asserting themselves.”
On May 22, the RBI’s top officials also met with board members of public sector banks in Delhi. While it was a similar closed-door meeting, the RBI did not release the Governor’s opening remarks.
