Mumbai: The Reserve Bank of India (RBI) on Thursday laid out a road map to deal with a surge in bad loans in the `82 trillion banking system.
The framework outlines a corrective action plan that will offer incentives for early identification of stressed assets by banks, timely revamp of accounts considered to be unviable, and prompt steps for recovery or sale of assets in the case of loans at the risk of turning bad.
RBI has been worried about the pile-up of bad loans in India’s banking system as slower economic growth, which slumped to 5% in the last fiscal year—the least in a decade—high borrowing costs and stalled projects make it difficult for corporate borrowers to repay debt.
About `2 trillion in loans is now classified as bad loans and at least `4 trillion is being restructured. Together, this constitutes about 10% of all bank loans. A report released on Thursday by India Ratings and Research Pvt. Ltd, an arm of global credit rating agency Fitch, said stressed assets, including bad loans and restructured loans, are likely to increase to 14% of total loans by March 2015.
In an October interview, RBI governor Raghuram Rajan said “the pain of (loan) restructuring has to be borne fairly (between the lender and the borrower)”. Rajan said banks needed to closely monitor these loans, and act—some assets could be recovered by rolling over debt, others by infusing new blood in the management, and still others by simply pumping in more money.
On 17 December, RBI issued a discussion paper titled Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy.
On Thursday, the central bank issued final rules similar to the measures outlined in the working paper after taking public feedback into account.
Lenders will need to carve out as special category of assets termed special mention accounts (SMAs) in which early signs of stress are visible.
Accounts within this category will be put under three sub-categories, based on the period for which their principal or interest payments are overdue. The duration of overdue payments can range from under 30 days to 90 days. Loan repayments that are more than 90 days overdue are classified as non-performing assets (NPAs) under existing regulations.
If a borrower’s interest or principal payments are overdue by more than 60 days, a joint lenders’ forum must be formed by the bankers for early resolution of stress, RBI said.
The new rules also offer incentives to lenders to quickly and collectively agree to a resolution plan by offering better regulatory treatment for stressed assets where such a plan is under implementation.
As a way to discourage long-drawn-out negotiations between bankers, RBI said accelerated provisioning will be applicable if no agreement can be reached.
Gross NPAs of 40 listed Indian banks rose to `2.29 trillion as of September, up 37% from last year. Rising bad and restructured loans hurt the profitability of banks because they have to set aside more money top cover such loans.
An important part of the new framework is the independent evaluation of large-value restructuring that has now been made mandatory.
Restructuring proposals in accounts where the aggregate exposure of banks is above `500 crore will now be subjected to assessment by an independent evaluation committee (IEC) of experts.
“The IEC will look into the viability aspects after ensuring that the terms of restructuring are fair to the lenders,” said RBI.
The committee will submit its recommendations to the corporate debt restructuring (CDR) cell within a period of 30 days.
The proposal gains importance in light of the spurt in cases of CDR during the past few years. About `4 trillion of loans is being recast by Indian banks both through the so-called CDR mechanism and on a bilateral basis between individual banks and borrowers.
The new rules also permit leveraged buyouts for specialised entities for acquisition of “stressed companies” and outlines steps to enable better functioning of asset reconstruction companies.
“Appropriate incentive structures may be built so as to provide greater role to PE (private equity) firms and other institutions in restructuring of troubled-company accounts. These institutions can be expected not only to bring additional funds for restructuring, but also bring in expertise for management of the business unit in question,” RBI said in a statement.
Further, banks will not be allowed to offer finance to such specialized entities put together for acquisition of troubled companies.
“It (the set of guidelines) brings some much-needed attention to a very important area,” said Shinjini Kumar, a director at PricewaterhouseCoopers. “A secondary market in stressed debt will ensure good credit quality and improve confidence in banks.”
Going by the new rules, borrowers who do not cooperate with lenders in bad-loan resolution will have to pay higher interest for any future borrowing. Banks will also be required to make higher provisions for further loans extended to borrowers who are considered to be “non-cooperative”.
In the interest of better information sharing within the banking system, RBI said it will set up a central repository of information on large credits to collect, store and disseminate credit data to lenders.
For this, banks will have to furnish credit information on all their borrowers having aggregate fund-based and non-fund-based exposure of `5 crore and above.
Click here to read more details.