Following the executive order by the government to empower the Reserve Bank of India (RBI) for the resolution of stressed assets, the central bank is expected to announce detailed guidelines for banks.
This may include time-bound resolution to such assets.
RBI will give banks specific time-frames within which they have to either decide the borrower is bankrupt or restructure the debt while taking a haircut, bankers said.
In a statement, following the government announcement, RBI reiterated that lenders must scrupulously adhere to the timelines prescribed in the Joint Lenders’ Forum framework for finalising and implementing the corrective action plan.
“To facilitate timely decision making, it has been decided that, henceforth, the decisions agreed upon by a minimum of 60% of creditors by value and 50% of creditors by number in the JLF would be considered as the basis for deciding the CAP, and will be binding on all lenders, subject to the exit (by substitution) option available in the Framework,” RBI said.
The banking regulator said non-adherence to the instructions and timelines specified under the framework will attract monetary penalties.
“Amendments to the Banking Regulations Act, coming on the heels of the enactment of the Insolvency and Bankruptcy Code and amendments to the SARFAESI and Debt Recovery Tribunal Acts, indicate the Government’s firm commitment to find a satisfactory solution to the NPA resolution problem,” Arundhati Bhattacharya, Chairman, SBI said on the government’s ordinance to resolve NPAs.
“Empowering the RBI with an explicit mandate should reorient various stakeholders for effective NPA resolution.
The country and its banking system need to move quickly and decisively to take benefits of these enabling provisions,” she added.
According to bankers, the final decision will be taken by a bank within the RBI’s guideline framework. However, the process will make it explicit that such a decision has the central bank’s and the government’s backing. Bankers are hesitant to take a decision on haircuts while restructuring loans or going for one-time settlement for fear that such a decision could prompt investigation by agencies.
The government has amended the Banking Regulation Act, Section 35 A, to tackle the bad loan problem that is choking bank credit. While the laws have been amended to give RBI more power, the idea of forming a ‘bad’ bank has taken a back seat, it appears. The main reason is the huge amount of capital required, to the tune of ₹30,000, which the government needs to infuse as initial capital to a ‘bad’ bank. The economic survey of 2016-17 has pointed out the twin balance sheet problem - that is stressed companies on one hand and NPA laden banks on the other hand and advocates that a centralised Public Sector Asset Rehabilitation Agency (PARA) could be established to deal with the problem of bad loans.
“Bringing Reserve Bank of India (RBI) on board by taking their buy-in for the overall resolution decision-making process does pave the way for a more collaborated and concentrated effort,” Udit Kariwala, Senior Analyst, India Ratings.
“However, a larger question to be asked pertains to the independence of banks in making commercial lending decisions; making the regulator a part of this process does pose questions on the effectiveness of bank managements as a custodian of depositors hard earned money,” he said.
Bad loans in the Indian banking system has gone up sharply in last one year. According to Reserve Bank of India data, gross NPA, as a percentage of gross advances went up to 9.1% in September 2016 from 5.1% in September 2015. During the same period, stressed assets which is gross NPA plus standard restructured advances and write-offs, moved up from 11.3% to 12.3% and some estimates suggested it doubled since 2013. Public sector banks share a disproportionate burden of this stress. Stressed assets in some of the public sector banks have approached or exceeded 20%. Some estimates suggest the total stress in the Indian banking system is about ₹14 lakh crore.
