Responding to a Right to Information (RTI) query from Mint, RBI said the total outstanding loans of borrowers, who defaulted on bank loans (under the one-day default norm), has declined more than 60% to ₹ 55,070 crore on 30 September 2018 from ₹ 1.53 trillion on 30 June. To be sure, these are not soured assets, but loans where borrowers did not pay instalments on time. However, the data also shows that one-day defaults dipped to a low of ₹ 50,306 crore on 31 August from ₹ 91,280 crore on 31 July and rose 9% in September.
“There is a clear change in borrowers’ behaviour and banks are also more alert in taking up these incidents. A message has been sent to errant borrowers that defaults would not be tolerated," said Arijit Basu, managing director of the State Bank of India.
Large borrowers, experts say, have started paying up on time due to fears of their companies being referred to the bankruptcy court and eventually losing control of their assets.
In its circular, the central bank asked lenders to institute a board-approved policy for resolution of stressed assets. Banks were told to start the resolution process as soon as a borrower defaults on a term loan and were given 180 days to cure it, failing which the account would have to be referred to the National Company Law Tribunal (NCLT).
Under previous guidelines, lenders had the freedom to initiate the resolution process after 60 days of default.
“Earlier, only the NPA (non-performing asset) classification was taken seriously by borrowers, not defaults. That has changed as banks no longer want any stressed asset on their books and, subsequently, the amount of loans under special mention accounts (SMA) has also dropped," said Basu. To some extent, the introduction of the Insolvency and Bankruptcy Code (IBC) had also helped, he added.
Asset quality of banks improved in Q2 FY19, with gross NPAs as a percentage of total loans declining from 11.5% in March 2018 to 10.8% in September 2018.
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The one-day default norms were initially not received well by the industry and a section of lenders. So much so that in April last year, RBI deputy governor N.S. Vishwanathan explained in a speech that the revised framework tries to reduce the arbitrage borrowers are currently enjoying while raising funds through borrowing from banks, as against raising funds from the capital markets.
He had said that if a borrower delays coupon or principal payment on a corporate bond even for a day, the market would penalize the borrower heavily, but defaults in bank borrowings have not led to a similar reaction. “There is a need to change this and restore the sanctity of the debt contract, lest bank debt becomes subordinate even to equity," he had said.
According to RBI data, the top 100 large borrowers accounted for 16% of gross loans and 21.2% of gross NPAs of banks at the end of the September quarter of FY19.
For large borrowers, the proportion of outstanding loans with any signs of stress (including SMA 0, 1, 2, restructured loans and NPAs) has come down from 30.4% in March 2018 to 25.4% in September 2018.
Some experts say the one-day default norms are hard on some borrowers, who default due to genuine business concerns.
Former RBI deputy governor S.S. Mundra said that while it is critical to keep strict timelines for monitoring credit quality, it has burdened bankers who are already pressed for time.
“In some cases, where the defaults occur owing to genuine cash flow issues, banks nonetheless have to start the resolution process, arrange meetings and look for revival plans," Mundra said. “This has to be done each time a borrower defaults and it has to be stopped as soon as they repay, leading to an exercise that could have been avoided had there been a buffer period."
However, the former RBI deputy governor added that not only has IBC changed the way a borrower looks at the system, but bankers also have begun timely stress assessment exercises.