New bad loan norms balanced; offer banks, borrowers a big breather

  • Crisil and BofA-ML said the new norms will gives a big breather to both banks and stressed companies
  • Crisil said the immediate breather will be for the power sector companies which owe 1 trillion

Mumbai: Analysts at rating agency Crisil and American brokerage BofA-ML on Monday termed the new bad loan resolution framework issued over the weekend as "balanced" as it gives a big breather to both banks and stressed companies.

Terming the new stressed asset resolution framework, issued by the monetary authority last Friday, after the Supreme Court had struck down its more stringent circular issued on 12 February 2018, as a "balanced" regulation, Crisil said the immediate breather will be for the power sector companies, which owe 1 trillion, and the banks with exposure to these companies as otherwise they would have been staring at "significant" haircuts from these accounts.

"The new prudential framework is a breather for stressed accounts where resolution plans were underway but had to be referred to the IBC because of not being completed in 180 days," the agency's senior director Krishnan Sitaraman said in a report on Monday.

Crisil said the revised framework which was released last Friday after the original one issued on 12 February 2018, was struck down by the Supreme Court earlier this year.

Crisil said it "strikes a fine balance between tight regulatory timelines mandated previously for resolving stressed assets, and inordinate delays that occurred in the past when resolving and provisioning for such assets".

The change in timelines for implementation of the resolution plans, including the 30-day review period will help lenders formulate their strategies, while doing away with mandatory referral to IBC can lead to improved realisations as intrinsic value of assets can be preserved, it said.

At the same time, the provision for accelerated provisioning will disincentivise lenders from avoiding referring cases to IBC, the agency said.

Foreign brokerage Bank of America Merrill Lynch said the new framework accords banks flexibility to restructure stressed loans bilaterally (with provisions) or refer them to NCLT for auction.

"The new circular is far more practical in providing creditors the choice between resolution with the borrower or referral to the NCLT for auction," it said, adding such a move will aid its call for rate cuts.

If a bank sees potential turnaround, it must walk the talk by additional provisioning of 20% after 180 days and 35% after 365 days in the interim, rather than follow a one-size-fits-all diktat of sending all stressed assets to the NCLT after six months.

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