Friday, November 28, 2014

Dual price market in bad bank loans

A few days back I blogged about the distortions caused by the dual price market in labor wages. Another dual price market created by administrative fiat, in the aftermath of the global financial crisis, is on the classification of impaired assets by India's banks. Non-performing assets (NPAs) and loan restructuring have risen steadily since 2008. The RBI allowed a differential loan book classification of both types of assets in the aftermath of the crisis.
If an account becomes an NPA, it requires 15 per cent provisioning, while a restructured asset needs 5 per cent provisioning. 
The result has been bank managements scrambling to recast bad loans through debt restructuring and avoid NPA classification, thereby kick the can down the road, possibly to a successor CMD, on increased provisioning. It has also served to paper over the dregs of crony capitalist orgy over the past decade. The RBI Governor has been emphatic in denouncing such "risk-less capitalism".

Fortunately, unlike other dual-price markets, this has a sunset - the RBI mandates 1 April, 2015 as the end of this regulatory forbearance.

No comments: