Morgan Stanley slams RBI for easing norms

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Dinesh Narayanan

Morgan Stanley has said it would sell bank stocks at 'each and every rally' as it believes looser asset classification norms announced on December 6 would put banks at higher risk.

The Reserve Bank of India allowed banks to restructure real estate loans on softer terms and relaxed norms for recognition of bad loans owed by other borrowers.

"The fact that it (RBI) is still taking these steps implies that the underlying problem in these sectors is really bad, in our view," analysts Anil Agarwal, Ashish Jain and Mansi Shah wrote in a report.

RBI's prudential norms are far stricter than what many developed countries apply to their banks. Its caution was vindicated recently when Indian banks remained reasonably insulated from toxic assets that brought down hallowed financial institutions in advanced markets.

An analyst with a local broking firm, who did not wish to be named, agreed with the view that the new norms increase the risk for banks. The analyst, who has a 'buy' on state-owned banks, however, said the risks will be significantly lower if the economy improved.

Another problem with the easier norms is the lack of transparency, the Morgan Stanley analysts asserted. Since banks are required to report non-performing assets at the end of the financial year, investors will not be able to figure out the health of their assets if they are allowed to restructure them. If the assets did become bad, they will show up only in the results of the fiscal year ending March 2010.

The Reserve Bank of India allowed banks to restructure loans to the real estate industry to let developers pay lower interest rates and defer repayments.

Banks can do this until June 30, 2009. They can also recast other borrowers' liabilities twice before June 30, 2009, which means the loans need not be classified as non-performing assets (NPA) for a longer period. Current rules require banks to call a loan non-performing and provide for it, if the borrower defaults on payments for three months.

Announcing the measures, RBI Governor D Subba Rao had said that there was evidence of economic activity slowing down.  Higher input costs and lower demand are denting corporate margins. The uncertainty is affecting business sentiments. "A period of painful adjustment is inevitable," the governor had concluded.

That means the RBI is encouraging leniency at a time when its own analysis of the scenario is rather bleak. Other countries are asking banks to back up business with more capital but the RBI move allows Indian banks to get away with less provisioning.

Dinesh Narayanan is Associate Editor with the new business magazine to be launched by Network18 in alliance with Forbes.