Round two of the war on non-performing assets (NPA) is set begin soon as the 180-day deadline for resolving loan defaults ends on August 27.
Round two of the war on non-performing assets (NPA) is set begin soon as the 180-day deadline for resolving loan defaults ends on August 27. On February 12, the Reserve Bank of India (RBI) replaced a dozen asset resolution mechanisms with just one in tandem with Insolvency and Bankruptcy Code (IBC).
Under the rule, the central bank set a strict timeline for classifying and resolving loan defaults, failing which accounts will be transferred to the National Company Law Tribunal (NCLT) for resolution under the IBC. The new rule kicked on March 1, and any account of identified as an NPA on the date, if not resolved, would go through the IBC process.
Some media reports say that about 70-80 accounts may go to NCLT as bank are finding it difficult to resolve their bad loans. Of these, the power sector is likely to be the biggest contributor. Bank of America-Merrill Lynch (BofA-ML) estimated that banks have exposure of Rs 2.6 lakh crore from the power sector.
The RBI circular was challenged in Allahabad High Court but the central bank has clarified that rules cannot be relaxed for the power sector. The final ruling of Allahabad HC is pending.
As a result of RBI strict timeline on NPAs, banks made higher provision in the first quarter of FY19. NPA ratio increased to 7.92% in Q1FY19 from 7.52% in Q1 FY18. Due to higher NPA provisioning, net profits of all banks declined by about 30% in Q1 FY19 as compared to about 18% witnessed a year ago.
What RBI Feb 12 circular stated: Key highlights
- Lenders will identify stress in loan accounts immediately on default and classifying stressed assets as special mention accounts (SMA)
- Banks should resolve loan defaults in 180 days
- If not resolved, lenders — singly or jointly — will take accounts having exposure more than Rs 20 billion beginning March 1 to NCLT within 15 days