What RBI’s new bad loan rules mean for banks
RBI deputy governor N.S. Vishwanathan has indicated that the new rules for bad loan resolution won’t be eased and asked banks to be more proactive in that regard
In a speech last week, N.S. Vishwanathan, deputy governor of the Reserve Bank of India (RBI), indicated that the central bank may not relax the new framework for resolving stressed loans as requested by banks. Instead, he asked banks to be more proactive in identifying stress early and act swiftly. A look at the new norms and what they mean for banks:
What are the new norms on resolving stressed loans?
The rules, released on 12 February, stipulate that starting 1 March, lenders must implement a resolution plan within 180 days for defaulted loan accounts above Rs2,000 crore. Failing to do so, the account must be referred to insolvency courts. They also mandate banks to report defaults weekly to RBI, even if loan payments are delayed by a day. These norms also replace earlier schemes such as strategic debt restructuring, 5/25 refinancing and the Scheme for Sustainable Structuring of Stressed Assets.
How does this affect banks?
Bad loans, currently at Rs8.82 trillion, are expected to go up as the new rules don’t give lenders much discretion. Additionally, seeking approval of all lenders within the given period is seen as tough. There is a high probability that around Rs2 trillion of restructured loans will be referred to the bankruptcy court. Banks will be forced to cover these accounts by making additional provisioning, keeping their profitability under pressure.
What relaxations have banks sought?
Banks had lobbied for extending the time period for resolution, and also asked for a relaxation on the one-day default clause. According to bankers, short-term cash flow mismatches often lead to delayed repayment by some corporate borrowers and is not really a default. Banks had also sought the continuation of joint lenders’ forum.
What is RBI’s view on the new norms?
On 18 April, RBI deputy governor Vishwanathan indicated there would not be any relaxation. He said the new rules are in sync with the insolvency code, which focused on time-bound resolution, and are aimed at improving credit culture. He asked banks to spot stress signs early to ensure loan repayment schedules are customized as per the cash flow of borrowers.
What is the situation on bad loan resolution?
Currently, the 12 large accounts referred for insolvency proceedings following RBI’s direction in June 2017, are nearing the 270-day deadline for resolution under the insolvency code. So far, resolution plans have been approved for only one out of the 12 accounts, where banks have claimed dues of over Rs3 trillion. Additionally, insolvency petitions have been admitted against some of the 29 accounts identified by RBI in its second such direction.