The Reserve Bank of India (RBI) has cautioned banks against trying to conceal the real status of their non-performing loans while red-flagging governance gaps at certain lenders.

RBI Governor Shaktikanta Das today said the central bank during the course of its supervisory process has come across certain instances of banks using innovative ways to hide the actual status of stressed loans. He raised concerns over attempts to evergreen loans.

While not naming any bank, Das cited examples of supervisors finding some instances of sale and buyback of stressed loans between two lenders which showed signs of evergreening.

“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; good borrowers being persuaded to enter into structured deals with a stressed borrower to conceal the stress…" Das said during his inaugural address to directors of banks at a conference organised by the RBI.

The other ways to evergreen include the use of internal or office accounts to adjust the borrower’s repayment obligations; renewal of loans or disbursement of new or additional loans to the stressed borrower or related entities close to the repayment date of the earlier loans.

“Such practices beg the question as to whose interest such smart methods serve. I have mentioned these instances to sensitize all of you to keep a watch on such practices," Das added.

The banking sector, however, is “strong and stable”, Das said, with the gross NPA ratio at 4.41% and net NPA at 1.16% as of December 2022. Capital adequacy ratio was at 16.1% and provision coverage ratio at 73.20%. 

“It is in times such as these that complacency may set in. We have to bear in mind that risks often get overlooked or forgotten when things are going well. Therefore, boards of directors of banks and their senior management should maintain a constant vigil on external risks and build-up of internal vulnerabilities, if any," Das said.

Remarking on banks’ business models, Das said boards must pay specific attention to asset liability management (ALM) as it can lead to serious liquidity risks, as seen in the case of some banks in the US. Banks should adjust their business strategies to avoid creating vulnerabilities by being too aggressive.

“Over-aggressive growth, under-pricing or over-pricing of products both on the credit and deposit sides, concentration or lack of adequate diversification in deposit or credit profile can expose the banks to higher risks and vulnerabilities," Das said.

The RBI governor also expressed concern over another issue: gaps in the corporate governance of banks despite the regulator issuing guidelines.

Das said that robust governance in banks is the joint responsibility of the chairman of the board and the directors. Individual directors should not have any conflict of interest which may hamper their objectivity and independence. “It is the responsibility of the board to ensure that policies are in place to identify potential conflicts of interest and deal with them."

Das urged independent directors on the boards of banks to hold top bank officials to account. “We would not like this type of situation to develop. At the same time, there should not be a situation where the CEO is inhibited from doing his duties,” he added.

“It is necessary that independent directors are truly independent; that is, independent not only of the management but also of controlling shareholders while discharging their duties,” Das said.