The Telegraph
Since 1st March, 1999
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Data sharing to check bad loans

Calcutta, Oct. 16: Banks and financial institutions (FIs) are working on a plan that will enable them to share data on loan delinquency, check rising non-performing assets (NPAs) and tighten due diligence processes.

At present, data on companies is treated as confidential and not shared with other institutional lenders. As a result, a sub-standard asset with one bank remains a standard one with others. Lenders exchange information only if they are part of a consortium.

This has created a situation where defaulting companies have wangled loans from agencies that are outside a consortium, including public sector banks. Some financial institutions have already indicated that they are ready to share facts and figures with banks. “Rising NPAs are a concern. We will do whatever is good for the banking and financial sector,” a senior Industrial Development Bank of India (IDBI) official said.

If it happens, swapping data on borrowers will help contain the growth of non-performing assets, which is currently pegged at a little above Rs 60,000 crore, and give more teeth to recovery procedures. Several term-lending institutions have already begun issuing notices to defaulting companies to get their funds back.

The move has upset companies, which feel advances will be reined in further. “Advances by banks and FIs have already dried up for the industry,” sources said.

Bankers feel data sharing will also tighten lending parameters. One of the possible consequences of that would be that defaulters to a bank/institution would be denied fresh credit from other institutions—irrespective of whether they are in the public or private sector.

Passing on data to other lenders would make the group approach far more effective. It will cut off institutional finance to the whole group even if one company from the fold fails to repay institutions and banks.

Banking sources said this would pave the way for an internationally acceptable loan-sanctioning model to be put in place. In most countries, default clauses are part of credit pacts. Under it, not repaying one lender is deemed to be a default to all who have lent money.

“Companies are talking about transparency and corporate governance. This is a move in that direction,” bankers said. Data sharing will streamline the criteria on which an asset is treated as sub-standard, foster uniform provisioning, limit the deterioration in asset quality and repair bank balance-sheets.

Information will also be passed to rating agencies to ensure that loan-dodging firms do not take recourse to bonds.

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