RBI sets up committee to focus on bad loan resolution at banks

Mumbai: The Reserve Bank of India (RBI) has identified some large stressed loan accounts for resolution as it steps in to directly fix the bad loan menace at Indian banks, after it was empowered by a recent banking ordinance to do so.

An internal committee of the central bank’s independent board directors will meet soon to decide which accounts should be restructured and which should go under the insolvency and bankruptcy framework, RBI deputy governor N.S. Vishwanathan said on Wednesday at a press conference after announcing the monetary policy.

“We have decided to focus on a few large stressed accounts under this framework and accordingly, a set of accounts have been identified, based on objective criteria. The decision on specific accounts out of these to be referred to IBC or to be restructured will be taken based on the guidance provided by the internal advisory committee,” Vishwanathan said. “The first meeting of the internal advisory committee is going to be convened very shortly,” he added.

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On 4 May, the Union cabinet cleared an ordinance to amend the Banking Regulation Act empowering the central bank to directly supervise the resolution of bad loans totalling Rs9.64 trillion at end of December. The central bank can now effectively ask banks to sit down with defaulters and reach a settlement. Following the ordinance, RBI framed an action plan to implement the ordinance.

In May, the regulator held a series of meetings with the Insolvency and Bankruptcy Board of India (IBBI), rating agencies, asset reconstruction companies (ARCs), private equity firms and investors to discuss the way forward for stressed accounts. The central bank is modifying existing restructuring guidelines so that stressed assets can be resolved in a “value optimising manner,” the central bank had said in a previous statement.

Separately, bankers have asked RBI for more powers to push errant borrowers to give up ownership and voting rights, effect a management change and even split the debt into sustainable and unsustainable parts to better restructure loans, according to two senior bankers. Currently, there are rigid rules for invoking these powers, a key reason for the failure of these schemes, according to bankers.

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“RBI has a strategy to deal with large stressed assets and we are working in a calibrated manner,” Vishwanathan said.

Under the action plan, the central bank has also proposed expanding the oversight committee from its current size of two members so that the panel can constitute separate benches to deal with the huge number of cases expected. The oversight panel will look at cases beyond S4A (Scheme for Sustainable Structuring of Stressed Assets).

“It is also heartening that the RBI has again reiterated its focus on resolution of stressed assets which will help to strengthen the banking system and ensure that investments made are optimally utilised,” said Chanda Kochhar, managing director and chief executive, ICICI Bank.