Considering the existing bad loan resolution schemes not working on the expected lines, and non-performing assets’ surging unabated, the Reserve Bank of India decided to withdraw all resolution schemes like CDR, S4A or SDR immediately and put them under the new framework. The new framework calls for banks to report the loan defaults on a weekly basis to the Credit Repository of Information on large credits and begin with a resolution plan immediately. The resolution plan may include slashing the interest rate, converting part of the loan into equity, or increasing the loan repayment period. The Central Bank estimates stressed advances which also include non-performing assets (NPAs) at 12.2 percent of the total loans.
The RBI’s Financial Stability Report said that even the accounts which have remained unpaid for the period of 60-90 days, also termed as SMA2 in the banking parlance, account for nearly 3.5 percent of total loans by the banks in September 2017. Scheduled commercial banks have outstanding loans in the tune of Rs 80 trillion as on September 29 last year.
How the new framework helps
- With the setting up of new rules by the RBI, recognition of the bad loans will become faster and foolproof.
- The new framework also states that two credit rating agencies should perform an independent evaluation of the new restructuring plan. It appears to be a more realistic mechanism as of now.
- The new restructuring framework also allows sale of the loans to other entities, including Asset reconstruction Companies (ARCs). It provides a much needed flexibility to come out with an effective restructuring plan, Business Standard says.
However, with the RBI announcing new norms, an increase in the reported NPA levels of the banks in the approaching quarters may be witnessed, The Indian Express analyses. Other than the industrial loans, the stress may also soar in the agriculture loans with more farm loan waivers and UDAY a near failure, loans to state electricity boards will also start feeling the pinch, the article further stresses. Another solution to counter the non-performing asset problem solution could have been to privatise some of these public lenders either by strategic sales or by cutting the government stake under 51 percent, the article suggests.