Spurt in unsecured advances due to 3G debt.
The huge outflow from banks to fund 3G and broadband licences of telecom companies has meant a spurt in their unsecured portfolio. As a result, some banks are on the brink of breaching their internal cap on unsecured loans.
So, they want the Reserve Bank of India (RBI) to consider licences to telecom companies as tangible assets and, hence, classify such loans as secured advances.
While meeting RBI deputy governor Subir Gokarn and other central bank officials tomorrow for the scheduled pre-monetary policy discussions, bankers will make a strong pitching this regard. Banks have extended about Rs 67,000 crore to telecom companies this month to secure the 3G auction licences. As a result, year-on-year bank credit growth for the first quarter of the financial year has been nearly 20 per cent.
By present rules, a licence given to telecom companies is a right, not formation of an asset. Hence, it is treated as an intangible. According to RBI norms, advances to intangible assets would be an unsecured advance.
“Most banks have taken huge exposure in the recently concluded 3G auction and broadband licences. As a result, unsecured loans’ proportion to total lending has risen significantly for many,” said a senior in a public sector bank.
The internal cap of banks regarding unsecured advances is decided by their respective boards. It is 25-30 per cent of the total loan portfolio for most of them. Though they can seek board approval for increasing the cap, they fear RBI may frown on this as not being prudent.
Increasing secured lending will also mean higher coverage provision and, hence, lower profit. This is something banks are not willing to do, bankers said. RBI norms prescribe higher provisioning norms for unsecured loans than secured loans.
Not only is the initial provision requirement for a doubtful unsecured advance higher, but a lender has to make 100 per cent provision for these after a year. By contrast, this is three years for secured advances.
Liquidity
Liquidity is another issue topping the pre-policy meeting’s agenda. It dried during June and RBI had to take some supportive measures. These were later extended, as liquidity continues to be tight.
On July 2, RBI raised policy rates by 25 basis points each to tame inflation. While the raise was expected, market participants were surprised by the timing, expecting this during the first quarter review of the annual monetary policy. Now, another round of policy rate increases is expected on July 27, when RBI will announce the first quarter review.
Bankers will also take up the issue of a sunset clause on the benchmark prime lending rate at tomorrow’s meeting. While the banking industry has migrated to a base rate regime, RBI has allowed existing customers to continue with the BPLR system. Bankers running two separate systems will be a challenge and the central bank should invoke a sunset clause for all BPLR lending.
