Restructured Loans – A ticking time bomb in the bank’s Balance Sheet

The banking system today owns trillions of dollars of restructured loans in their Balance sheet The forbearance of regulators on restructuring of loans at times led to ever greening and the absence of provisioning on restructuring has killed the credit quality. Very often we find large borrowers get away with liberal restructuring terms whereas small borrowers face a stringent one. Most of these restructured loans finds its way to NPL(Non-performing Loans) and eventually banks have managed to reduce their NPL through write-off’s than recoveries. There are many stake holders who get away in the process. The auditors who have certified clean balance sheets for a borrower actually in trouble, the advocates who have given clear legal titles for assets which are not so, should all be made accountable. Many a times the banks get out of trouble with tax payer funded bail outs. The regulators should insist on certain minimum provisioning on these accounts and the banks need to have a strong EWI (Early warning indicator) system to track the weakness in any account. From the Capital Adequacy perspective the stress impact on account of these loans should be built in. These loans are certainly a mine field to look for.

Three Cube will be soon initiating a coverage on the restructured loans and its impact on various economies. In Middle East we will start with Oman.

2014-03-01