Despite the Reserve Bank of India's (RBI) hard talks against loan defaulters, banks are expecting more pain in terms of asset quality as the systemic gaps allow bad borrowers to divert funds and go scot-free under the garb of economic slowdown. 

Bankers said this trend has almost become viral and put an added stress on the bad loan scenario which has anyway been weighed down by slower economic expansion. It's also a common refrain from bankers that borrowers misuse the debt restructuring facility and use the banking system to recapitalise their failed ventures. 

Rajan has declared a war against defaulters by saying that promoters do not have a divine right to continue if an enterprise flops, but the existing legal and administrative gaps have created enough doubts in the mind of a banker that nobody is expecting a quick-fix solution to the spiralling NPA situation. 

"Although RBI governor's statement on NPA has sent a strong signal to defaulting borrowers, banks are facing difficulties at the field level in implementing SARFAESI Act and taking physical possession of mortgaged properties due to administrative gaps. This needs to be addressed first, otherwise bad borrowers will continue to use the loopholes and make mockery of the system," United Bank of IndiaBSE 1.48 % executive director Deepak Narangsaid. 

Rajan has mandated deputy governor KC Chakrabarty to take a close look at rising NPAs and the restructuring process. The central bank has proposed to collect credit data and examine large common exposures across banks to create a central repository on large credits. "Nothing can change overnight," said South Indian Bank managing director & chief executive officer VA Jospeh. "There are gaps in the system and hopefully the committee finds out the lacuna in the system and address it." 

Some suggest that the RBI may use its RTGS network to find the trail of the diverted money. "Even if we know that bank loans are being diverted, we don't have the ammunition to find the trail and create charge on the asset, limiting our ability to recover loans. The RBI's RTGS network can be used in such cases effectively," a senior bank executive said in the condition of anonymity. 

The sluggish economic growth has already led to a sharp rise in NPAs, with the gross ratio touching 3.9 per cent in June. The RBI has estimated that gross NPA may rise to 4.4 per cent if the macro-economic situation does not improve. Besides, banks are sitting on a pile of restructured loans. 

The Corporate Debt Restructuring Cell has approved 415 accounts amounting to Rs 2.5 lakh crore in the past eight years. By a very conservative estimate, even if 10 per cent of it turns bad, a whopping Rs 25,000 crore worth of loans will add to the NPA list. 

With the first quarter GDP growth slowing to 4.4 per cent, a four-year low amid a contraction in mining and manufacturing sectors, banks have every reason to lose sleep. The future looks grim, with global investment bank Nomura cutting India's real GDP growth estimates to 4.2 per cent for 2013-14 from 5 per cent earlier. (Economic Times)