Photo: Bloomberg
Photo: Bloomberg

RBI reviews joint lender forum guidelines

RBI sets up a separate empowered group of lenders that can speed up decisions to resolve stressed assets

Mumbai: The Reserve Bank of India (RBI) on Thursday asked banks to set up a separate empowered group of lenders that can speed up decisions to resolve stressed assets. The central bank also said that lenders who do not want to participate in a restructuring or revival plan can choose to sell their exposure to another lender.

RBI’s joint lenders’ forum (JLF) guidelines came into effect in 2014 after the central bank put a new framework in place to tackle stressed assets. JLFs were intended to recognize stressed assets early and come up with a corrective action plan (CAP) within 45 days. The system, however, did not work seamlessly as there were disagreements between lenders on how to move forward on individual accounts.

To streamline some of these issues, RBI has asked banks to set up an empowered group (JLF-EG) which will be tasked to approve the restructuring package.

The JLF-EG will have a representative each of the State Bank of India and ICICI Bank Ltd (the largest state-owned and private sector lenders) as standing members, said RBI. In addition, the group will have a representative each of the top three lenders to the concerned borrower. The members of this group will be of the rank of executive director or above.

Decisions taken by JLF will from now on be sent to this empowered group for approval.

“It has been represented to us that sometimes boards of the banks find it difficult to approve the decisions taken by JLF as the JLFs do not have senior-level representations from the participating lenders. In this regard, it is clarified that, although RBI has not explicitly prescribed the level of representation in its guidelines, banks are expected to depute sufficiently empowered senior-level officials for deliberations and decisions in the meetings of JLF," the central bank added in its notification.

“It will be a challenge to find ED (executive director) level people to be part of the empowered group," said Pradeep Kumar, managing director and group executive for corporate banking at State Bank of India. The current challenge is that since junior executives attend the JLF meetings, it takes time for them to go back to the bank’s board to get approval, Kumar added.

The revised guidelines also give lenders the option to exit their exposure to a company if they disagree with the restructuring plan.

“Selling your exposure is not very feasible as there won’t be enough buyers. Unlike global markets, there is no secondary market for loans sold at a discount in India," said Kumar commenting on the proposal to allow smaller lenders to exit their exposure.

In a number of cases, smaller banks have not been willing to commit additional capital as part of a restructuring package due to their own constraints. However, under the current rules, if a restructuring package is approved by 75% of creditors by value and 60% of creditors by number, other banks have to go along with it.

In order to give smaller lenders a way to opt out, RBI said that these lenders can sell their exposure to an existing or new lender.

“ has been decided that dissenting lenders who do not want to participate in the rectification or restructuring of the account as CAP, which may or may not involve additional financing, will have an option to exit their exposure completely by selling their exposure to a new or existing lender(s) within the prescribed timeline for implementation of the agreed CAP," said the RBI notification.

The new lender has the option not to participate in any additional financing needed as part of the restructuring.

“If the new lender chooses to not participate in additional finance, the share of additional finance pertaining to the exiting lender will be met by the existing lenders on a pro-rata basis," RBI added.

RBI’s stressed asset framework is intended to slow down the buildup of bad loans in the banking sector.

According to a 9 September report by consulting firm EY, the overall level of stressed loans—or the sum of gross non performing assets (NPA) and gross restructured assets—went to over 11% in March 2015, from 9.2% in March 2013. Similarly, gross NPAs rose to 4.6% from 3.4% in the same period.

At the 39 listed banks, gross NPAs rose 27.7% to 3.21 trillion as on 30 June from 2.51 trillion a year earlier.

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