RBI Governor flags innovative ways to conceal real status of stressed loans at some banks: Key takeaways

RBI Governor Shaktikanta Das said the central bank has come across instances of some lenders trying to conceal the real status of their stressed assets. "During the course of our supervisory process, certain instances of using innovative ways to conceal the real status of stressed loans have also come to our notice," said the RBI Governor, without naming any bank. He also mentioned governance gaps at certain banks that have come to the notice of the RBI.

"To mention a few, such methods include bringing two lenders together to evergreen each other’s loans by sale and buyback of loans or debt instruments," said Das. He was addressing a conference with directors of private sector lenders on May 29 in Mumbai. 

He also mentioned:

• 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
• related entities closer to the repayment date of the earlier loans

Here are some key takeaways: 

• "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. Such practices beg the question as to whose interest such smart methods serve," he said. "I have mentioned these instances to sensitise all of you to keep a watch on such practices."
• Das also said that despite the guidelines on corporate governance, it was a matter of concern that the RBI has come across gaps in governance at certain banks, which have the potential to cause some volatility in the sector. 
• "While these gaps have been mitigated, it is necessary that boards and the managements do not allow such gaps to creep in," Das said.

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• Das pointed out that the RBI has noticed discrepancies despite having issued guidelines on governance in banks. The banks' boards as well as management should be more strict over any such lapses, he said. 
• Stressing the importance of the role played by a lender's top management, he said: "The role of Chairperson is akin to the captain of a ship." Chairpersons should encourage open and honest discussions which, at times, can be critical of the proposals recommended by the management, he said. "Fostering an environment where dissenting views can be freely expressed and discussed is what will ensure objectivity – an absolute necessity for long-term sustainable performance of a bank," Das added. 
• The MD and CEO is expected to function under the overall supervision, direction and guidance of the board, and maintain independence in performance of duties. "At times, however, 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. We would not like this type of situation to develop," the RBI chief said.

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• "There should not be a situation where the CEO is inhibited from doing his duties,"  Das warned. Directors and CEOs should foster an atmosphere of free and fair discussions in board meetings, he added.  
• A robust governance structure is the most important requirement to ensure the stability of a bank and sustainable financial performance, he said.
• The RBI had earlier met directors of banks of public sector lenders on May 22.