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RBI makes it tough for firms to get away with loan default

Feb 27 2014, 18:21 IST
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After putting up a plan for better fire-fighting against bad loans, RBI Governor Raghuram Rajan has finalised the rules for Indian banks. After putting up a plan for better fire-fighting against bad loans, RBI Governor Raghuram Rajan has finalised the rules for Indian banks.
SummaryNPAs and restructured loans in Indian banking sector have crossed 10 pct of total advances.

The Reserve Bank of India has moved in to make it difficult for corporate borrowers to escape repaying banks for their loans.

In less than a month after putting up a plan for better fire-fighting against bad loans, RBI Governor Raghuram Rajan has finalised the rules for Indian banks. The norms say that shareholders, including promoters of companies, will be asked to suffer the first loss instead of the banks that provided the debt.

To ensure more skin in the game of promoters when a loan is restructured, they would be asked to bring in more equity into the company. This equity will be put into an escrow or a trustee account till the company is revived. The banks will also have the right to complain about auditors to the Institute of Chartered Accountants of India if they are seen to have given clean balance sheets for a borrower actually in trouble.

Similarly, where advocates have given clear legal titles for assets which are not so, their names should be reported to the Indian Banks Association, the RBI rules say. Their names, like the auditors’, will be circulated among the banks before giving them any work.

The provisions will apply for large loans of over Rs 100 crore. Banks will need to come together in a Joint Lending Forum (JLF) to protect their interests even before the debt becomes a non-performing asset.

Non-performing assets and restructured loans in the Indian banking sector has crossed 10 per cent of total advances and, according to rating agency Crisil, could reach close to 15 per cent in another year. The JLF will begin much before the current system of corporate debt restructuring (CDR) cell and will consequently have a better chance to rescue the loans. The JLF will work with the borrower to put the loan back on track and for this purpose can also invite state or Central officials if there is a need for a change in policy to help the project. In recent years, nearly Rs 15 lakh crore of projects were stymied due to environmental and land-use policies of Centre and states.

The RBI rules will ensure that projects will not have to waste time for a decision on whether they are fit cases for CDR. Instead the JLF mechanism will come in. Banks will also be allowed to fund specialised entities which can acquire and turnaround troubled companies. “The

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