Banks caught in RBI-finance ministry divide

Just a few months after the finance ministry asked public sector banks to increase the tenure of home loans, the Reserve Bank of India (RBI) wants banks to increase provisioning for such extensions as they amount to asset restructuring.

The ministry's directive in August asking banks not to increase equated monthly instalments (EMIs) and instead increase the repayment tenure was aimed at providing some relief to customers amidst painfully high interest rates.

But, the banking regulator isn't amused by the directive.  It sees this as encroachment on its turf. The RBI has asked banks to treat a home loan tenure increase as loan restructuring.

As a result, additional capital is required to be set aside for those loans. Banks are already facing pressure on asset quality, following the economic slowdown amid high interest rates.

The additional provisioning requirement will add insult to injury as it will deplete their bottom line further.

According to RBI norms, standard assets restructured by banks will be immediately reclassified as sub-standard assets and attract higher provision.

Bankers say they are sandwiched between the RBI and the government. "The government directive has clearly not gone down well with the regulator. The central

bank is of the view the government should have consulted it before taking such a decision. Any such circular is ideally issued by the regulator," says a senior banker.

Several banks, including State Bank of India, Syndicate Bank and Central Bank of India, increased the home loan repayment tenure to 25-30 years, as compared to 20 years earlier, after the finance ministry circular.

Some of the banks, which were not willing to increase the repayment tenure, approached the RBI for a clarification on the provisioning requirement, and were told there would be no let-up on that.

Bankers said increasing the EMI tenure for a couple of years was a common practice done by way of an informal understanding with customers.

"However, now that the government wants to make it mandatory by issuing a circular, the RBI wants us to play by the book," says another banker.

Banks now blame the finance ministry for making an informal practice mandatory, for which they have to pay the price in terms of higher provisioning.

The issue was also raised during the post-policy meeting of bankers with senior RBI officials on October 25.

In the second quarter review of the policy, the RBI had announced the constitution of a working group to review existing guidelines on restructuring of advances. Bankers who attended the meeting said the working group was also expected to take up the issue.