The RBI puzzle.

The Reserve Bank has issued tighter guidelines for Non Performing Assets, as bad loans are described by banks, and restructured loans, where a new loan is issued to cover an old loan to provide more time for repayment. TOI, 4 February. As banks will be required to set aside more money to cover bad loans this will reduce Rs 150 billion from banks' earnings. Which explains why banks are reluctant to reduce lending rates despite the Cash Reserve Ratio being cut by 25 basis points to release Rs 180 billion to banks for lending. So on the one hand the RBI has loudly signaled that banks have to keep less cash in reserve to cover bad loans while on the other it has quietly told banks that they had better keep more money in reserve. Ratings agency, ICRA expects that the new guidelines will increase NPAs from 3.6% as on 30 September, 2012 to 6.5-7.5% on 30 June, 2015. So, is the RBI playing games with banks? Seems that a record 126 companies have approached banks to restructure their debts up to a total of Rs 840 billion. ET, 4 February. When a company is unable to repay its debt or the mounting interest banks will often issue a new loan with a longer repayment period to cover the debt. This converts a bad loan into a new one so the bank is able to show it as new business instead of reducing the amount from its earnings and the company has to pay a lower EMI helping it to avoid defaulting on its repayment. This may work in some cases but very often ends up in increasing the amount of bad loans in the future. In 2001 the RBI set up a Corporate Debt Restructuring system to help banks and companies deal with problem loans " due to factors beyond their control and due to certain internal reasons ". In the last quarter of 2012, ending 31 December 25 cases were referred to the CDR system for a total of Rs 200 billion. In 2010-11 the total amount of distressed loans was Rs 230 billion which has risen by more than 3 times to Rs 840 billion while the number of cases has risen by 78% in the same period. We are not told which companies are in trouble or the sectors where losses are being incurred so we are allowed to exercise our imagination. Private equity firm Blackstone is selling its stake in Embassy Property Developments in Bangalore for Rs 2.1 billion making a profit of 28% on its investment in just 18 months. Embassy is constructing 467 luxury apartments costing Rs 30-100 million each at Hebbal which is 30 minutes from Bangalore International Airport and the city center. Blackstone had invested by buying non convertible debentures which allows it to avoid a lock-in period under government rules. These mind numbing figures give an indication of size of the property price bubble in India but while a correction in property prices has occurred in other countries there has been no correction in India. With bad loans mounting will the bubble pop? We wait with bated breath.