How To Keep Loan Evergreen

If you are a banker or an official to regulate and monitor banks  or an auditing or inspecting official or an investor in bank shares ,you must read the article which follows below to know the hidden facts and to understand the bitter truth before it is too late.  There is an established practice in almost all coooperative banks to keep the loan account EVERGREEN. To Illustrate and to make it more clear :   say a bank  disburse a loan of  Rs10000 to a farmer and the account become overdue after a year or two , the same bank sanction a loan of Rs20000 or Rs.30000 which enable farmer to repay first loan and avail only extra loan . In the same way bank use to sanction inflated loan year after year which keeps the account always standard. During the course  of time , public sector banks have also learnt the art of keeping  the loan account evergreen. They have many tools in their clever brain to keep assets of bank always standard .  First and foremost is the  restructuring or rephasing of loan on flimsy ground and second to give additional loan to repay overdue loan. If even after such self deceptive acts ,banks fail to keep the account in standard category they feed wrong information in CBS system so that such accounts may not be identified as NON performing asset the exercise of identification of the system driven NPA. Then they try to prevail upon team of auditors to help them in hiding bad assets from the balance sheet. Next better  option is to sell the bad loan to ASSET RECONSTRUCTION COMPANY known as ARCs at discounted rate without caring for loss bank has to suffer and ultimately investor has to suffer by such unhealthy actions. Lastly they have option to write off the loan or sacrifice major portion of overdue loan which again adversely affects the bottomline of the bank and is indirectly a cheating treatment with investors and employees whose earnings depend on health of bank. Prudent bankers who are apt in art of keeping assets evergreen and standard , who know the art of managing auditors and concerned officials at various offices may only become ED or CMD of a bank .One who preach sermons to others but do not follow, one who can deliver good speech , who can manage boss and keep him happy by hook or by crook may only get the chance in promotion. In our country none is bothered of real health of the system, real health of the organisation and real welfare of common men ,but everyone is busy is dressing and decorating the outer appearance attractive .And this is the root cause that an institution or a country all of a sudden lands in unmanageable crisis. http://in.reuters.com/article/2012/06/20/banks-india-borrowers-restructuring-idINDEE85J03P20120620 (Reuters) - Lenders to Hotel Leela(HTLE.NS), a 5-star chain that is more than two months behind in payments on $700 million of debt, are likely to bite the bullet and amend the loan terms rather than declare it in default, say bankers involved in the talks. Restructuring corporate loans - allowing banks to dilute payment terms without classifying loans as bad - is on the rise in Asia's third-largest economy, providing a lifeline to borrowers struggling in a sharp economic slowdown, but piling more stress on bank balance sheets. Hidden weaknesses in bank balance sheets are a greater risk as Indian banks' reserve coverage ratio - the buffer a bank has to set off against loan losses - is among the lowest in Asia. Officially, 3 percent of loans in India are bad. Including restructured or "impaired" loans, for which banks don't have to set aside heavy provisions in case of default, the figure is about 7 percent, according to analysts. The reality is worse, say some bankers and industry experts, who say many loans are restructured outside official channels, with some banks and borrowers taking advantage of harder-to-track "evergreening" of loans to avoid declaring default. Under evergreening, banks provide additional loans to stressed borrowers, often indirectly, to enable them to repay existing loans. That can keep a loan from going sour, but it ratchets up a bank's exposure to a troubled credit. It's estimated that at least a tenth of loans to the real estate sector - where restructuring rules are stringent - are stressed, as against the 3-4 percent cited by banks, said Amit Goenka, head of capital markets at UK-based Knight Frank. "There's a certain amount of under-reporting arising out of evergreening of loans, which can never be precisely derived," said A.S.V. Krishnan, banking analyst at Mumbai brokerage Ambit Capital. Lenders are also staring at the prospect of more bad loans as the economy shudders. Standard & Poor's has warned that India could become the first of the BRIC economies to lose its investment-grade status on slowing growth and political roadblocks to economic policymaking. GRAPHIC: Restructured assets, click r.reuters.com/buz78s GRAPHIC: Stressed assets, click r.reuters.com/byb78s In the year to end-March, Indian banks sought to restructure a record $12 billion in corporate loans through the Corporate Debt Restructuring Cell (CDR), an RBI-approved consortium of lenders - an increase of 156 percent on the year before. And that excludes billions of dollars in loans restructured outside the official channel, including $4 billion of Air India debt and about $5.5 billion of loans at loss-making state electricity boards. "Going to CDR has almost become fashionable these days. Borrowers are exploiting the CDR mechanism without exhausting other genuine avenues of redressing their problems around over-leverage," Ambit's Krishnan said. The recent surge in loan restructuring may just be putting off the inevitable, though. Ratings agency CRISIL expects new loan restructuring over fiscal year 2012 and 2013 to hit $36 billion, and analysts warn that 25-50 percent of such loans are likely to turn bad and hit banks' profitability. Fresh restructuring of loans in the year to March 2011 was negligible. "Restructuring helps the company sometimes, but if you step back and see it leads to 'evergreening' of loans which can cause problems going forward," said Vikram Bajaj, director at Renaissance Capital Advisors, which advises companies on debt restructuring. "Basically, what you're doing is taking a call that the borrower may come out of the situation and you're giving him more money, but the odds, in most cases, are against it. Kingfisher Airlines is the biggest example of that." In the best-known recent example of a restructured loan turning sour, liquor baron Vijay Mallya's Kingfisher Airlines(KING.NS) defaulted to most banks on a $1.4 billion loan. PERILOUS PRACTICE Bankers defend the practice of restructuring loans, which typically entails extending tenure on the loan, easing interest rates or even converting debt into equity. "Actively restructuring loans has helped us in controlling slippage," said Pratip Chaudhuri, chairman of State Bank of India, the country's biggest lender. "We have to live with high restructurings now and look for recoveries tomorrow." The problem is that many such loans are never recovered and turn non-performing, adding to the challenge of collecting on bad loans in a country where there is no bankruptcy law - the absence of which makes banks more inclined to help borrowers rather than declare a loan to be in default and receive nothing. At SBI, 43 percent of loans restructured in the year to March 2010 were declared non-performing within two years, said Soundara Kumar, a deputy managing director at the bank. Central Bank of India, a mid-sized state lender, learned the hard way how quickly a restructured loan can go bad. In November, it agreed to restructure an $80 million loan to steelmaker Electrotherm, which was having difficulty with an order for a client in Tanzania. Within months of giving a breather to a long-time customer, Central Bank downgraded the loan to non-performing, and was the only listed bank to report a net loss for the March quarter. "They weren't able to execute the order. So they asked us to restructure the loan, and, in the March quarter, the account slipped. It happened very quickly," said a senior executive at Central Bank of India, who did not want to be identified. Another state-run lender, UCO Bank, ended its ties with Electrotherm when the steelmaker failed to make timely payments even when it was able to, a bank official told Reuters. "Electrotherm did not pay us the dues even when they had the liquidity and were still making profits," said UCO Bank Chairman Arun Kaul. UCO has classified the account as non performing and is in the process of recovering the loan, he said. Electrotherm's investor relations officers could not be reached for a comment for this article. In another case, lenders including SBI, Power Finance Corp and Rural Electrification Corp (RURL.NS) restructured loans to a hydropower project, which was mired in environmental clearances. The account turned bad within two years of being restructured, said a senior bank executive involved with the loan. Morgan Stanley expects "impaired loans" - bad and restructured loans put together - for all Indian banks to double to 10 percent of total debt within 18 months. Although the Reserve Bank of India is concerned about banks' rising bad loans, it does not see a risk due to aggressive debt restructuring. "I believe banks are doing it with understanding, with discretion," said RBI Deputy Governor K.C. Chakrabarty. "If they are not doing, we need to pull them up." EVERGREENING While restructuring is allowed by the RBI, the murkier "evergreening" of loans is frowned upon. Several bankers said it is widespread, but declined to give details. The practice is said to be particularly common in commercial real estate, where tougher restructuring guidelines require banks to classify a loan as non-performing and set aside more funds as provisions - effectively removing any official middle ground between a performing loan and a default. "Banks have been working actively to avoid such provisioning and classification," said Knight Frank's Goenka. "Real estate provisioning is seen adversely by the regulator and pushes up the cost of lending. This may have led to some evergreening-like measures within the financial institutions." Hotel Leela, which borrowed heavily for projects in Delhi and Chennai and recently sold a property to raise money, is seeking additional bank loans to pay its debt, said two sources directly involved in the restructuring. One of its lenders, Syndicate Bank (SBNK.NS), wants Leela's controlling shareholder to put in another 3-4 billion rupees in equity from the sale of a hotel in Kerala before it agrees to restructure the loan, a stance most of its lenders support, said an executive at another bank who has loans to Leela and is involved in the discussions. Hotel Leela Vice Chairman Vivek Nair did not respond to several calls from Reuters seeking comment for this article. "Leela is asking for about 600 crore more (6 billion rupees). Banks aren't willing to give as they want this to pay off some debt. That's evergreening. Banks want promoters to get more contribution, equity upfront," said another lender, who asked not to be named given the sensitivity of the matter.