Borrowing to become costlier for wilful defaulters, says RBI

Written by ENS Economic Bureau | Mumbai | Updated: Dec 18 2013, 13:50pm hrs
The Reserve Bank of India has proposed a host of measures, including expensive future borrowings for wilful and non-cooperative defaulters, joint lenders forum and formation of a central repository on large credits in a bid to contain the rising non-performing assets (NPAs) and boost recovery efforts.

In a discussion paper on early recognition of financial stress and steps for debt collection, the RBI has proposed incentives for lenders to agree collectively and quickly to a plan and better regulatory treatment of stressed assets if a resolution plan is underway, and accelerated provisioning if no agreement can be reached.

The RBI said banks will be required to make higher provisioning in respect of new loans to non-cooperative borrowers as also new loans to any other company promoted by such promoters or directors. The provisioning applicable in such cases will be at the rate of 5 per cent if it is a standard account and accelerated provisioning up to 100 per cent if it is an NPA.

The RBI paper follows a spike in bad loans in the last one year. If the NPAs and restructured loans are combined, the distressed loan ratio is close to 10 per cent, or around Rs 5,50,000 crore, as per the RBI figures.

The RBI will set up a Central Repository of Information on Large Credits (CRILC) to collect, store, and disseminate credit data to lenders. Banks and non-banking financial companies will have to furnish credit information to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs 5 crore and above.

To start with, reporting of an account with overdues (between 61 and 90 days) by one or more lending banks and NBFCs will trigger the mandatory formation of a Joint Lenders Forum and formulation of Corrective Action Plan. Banks must put in place a proper management information and reporting system so that any account having principal or interest overdue for more than 60 days gets reported on the 61st day itself, the paper said.

The RBI said takeout financing/refinancing should possible over a longer period and will not be construed as restructuring. It has mooted leveraged buyouts for specialised entities for acquisition of stressed companies and said sector-specific companies and private equity firms may be allowed to play an active role in stressed assets market.

For improvement in current restructuring process, independent evaluation of large value restructurings to be mandated, with a focus on viable plans and a fair sharing of losses (and future possible upside) between promoters and creditors.

The RBI will create a database of directors on the boards of companies classified as non-cooperative borrowers for dissemination to lenders.

In order to boost asset reconstruction companies (ARCs), sale of assets between ARCs may be permitted, the RBI said. The issue will be taken up with the Government. The ability of the ARCs to raise limited debt funds to rehabilitate units will be considered. This will be accompanied by increasing their minimum level of capitalisation in view of recent liberalisation of FDI ceilings and enhancement of working funds.

NEW PROPOSALS

* Early formation of a joint lenders forum with timelines to agree to a plan for resolution

* More liberal regulatory treatment of asset sales

* Lender can spread loss on sale over two years provided loss is fully disclosed

* Takeout financing/refinancing possible over a longer period and will not be construed as restructuring

* Leveraged buyouts will be allowed for specialised entities for acquisition of stressed firms

* Steps to enable better functioning of Asset Reconstruction Companies mooted.