The revised stressed asset resolution framework released by the Reserve Bank of India (RBI) on Friday is nothing but the original one with a dash of humility.
The central bank has managed to keep most of the elements of the infamous 12 February 2018 circular in the new one too.
There is no comeback of dispensation schemes such as strategic debt restructuring (SDR) or S4A. Bankers will continue to recognize defaulters as special mention accounts right from day one of default.
Most importantly, lenders cannot escape provisioning.
But since the original 12 February circular was seen as draconian and the Supreme Court had held it ultra vires (beyond RBI’s legal power or authority), the central bank has diluted some key parts.
Bankers now need not scramble for a resolution plan within 24 hours of a default by a borrower. They will have 30 days to monitor the account and frame a plan. They now have complete freedom to act as they want to resolve the issue. Using bankruptcy courts is not mandatory now.
This would benefit the power producers immensely, who led the legal battle against RBI in the Supreme Court. Lenders will have 180 days to implement a resolution plan after the 30-day review period from the date of default. Beyond 180 days, the banks can either resolve it through the insolvency courts or even outside.
But even though the clock starts ticking a bit late, lenders can’t escape provisioning.
“The consequence of missing 180-day deadline on resolution plan is now provisioning and not IBC. So there is discipline on banks," said Abizer Diwanji, partner and national leader, financial services at EY.
Lenders will have to make 20% additional provisioning if they miss the 180-day deadline on resolution.
Another 15% should be made if no resolution process can be figured out for more than a year.
This means that the needle on bank earnings may not move much in FY20. The stressed asset heap is yet to be dented in a significant way although banks saw their gross bad loan pile reduce for the first time in FY19.
Provisioning is unlikely to go down in a big way too.
To be sure, RBI is ready to allow banks to write back provisioning once a resolution plan is implemented. Herein comes the incentive to take the route of insolvency courts.
All banks have to do is apply for insolvency proceedings to write back half of the additional provisions made towards the defaulting account. Once the borrower is admitted into insolvency, the rest of the additional provisions can also be clawed back.
In contrast, for resolution outside the insolvency courts, provisions can be clawed back only after the resolution plan is implemented.
“The flow of cases into IBC should remain good. Though in the case of small cases, banks may wait it out," said Bikash Jhawar, partner at law firm L&L Partners. This provision claw-back is an incentive for banks to resolve default through insolvency courts.
That said, insolvency experts believe that for resolution process itself, not much will change post the new framework.
“IBC is wanting in terms of effective resolution. The delays there are costing creditors a lot of value. There doesn’t seem to be any remedy for this," said a consultant with a think tank.
RBI may have conceded some ground on stressed asset resolution but it has largely kept enough ammo with it.