NPA crisis: Even as Centre, RBI launch crackdown, here’s why gauging near-term impact is tough

While steps to resolve NPLs suggest a sense of urgency, past outcomes on resolution schemes make it hard to gauge its near-term impact.

RBI has not come out with any new guidelines but has strengthened its voice to its previous guideline. (Reuters)

RBI and the government made a few changes to resolve the chronic NPL problem plaguing the sector. The government notified an amendment to the Banking Regulation Act which aims to provide more clarity to the RBI on the issue. RBI in turn has marginally diluted the JLF scheme to accelerate the pace of resolution under JLF/CAP, voicing urgency to adhere to timelines. Directionally positive but bottlenecks are getting created in unknown areas in most resolution schemes making it harder to understand the near term impact.
Reaffirming the power of RBI through a gazette notification.

The government, through an ordinance, modified the Banking Regulation Act to give the RBI greater powers to address NPLs. This includes (i) power to direct banks to initiate insolvency proceedings in case of default under the insolvency code (ii) specific instructions to banks for resolution of stressed loans (iii) appointment of authorities to advise banks on resolution issues.

Moving proceedings of default through the insolvency code is positive as it aims for resolution in 180 days but we are not sure if the law has suitably addressed all stakeholder concerns since an Act would take two to three years to stabilise as case rulings strengthen the interpretation of the Act. On the other hand, we could look to see RBI appoint oversight committees (OC) directly rather than under the IBA umbrella that can accelerate decision making on NPLs.

RBI modifies the earlier JLF scheme to aid faster decisions

Key changes made by RBI under the framework for revitalising distressed assets: (i) decision is binding on all banks if approved by 60% by value of loans (75% earlier) and 50% by number of creditors (60% earlier) (ii) decisions taken in the JLF will be unconditional/unambiguous (iii) executives representing individual banks in meetings should have requisite approval to take decisions. Decisions taken will have implicit power of comfort from the board of these banks. (iv) Monetary penalties will be levied if the above is not adhered to.

Is this the silver bullet that one was waiting for?

One of the challenges that we have faced is inordinate delays in resolution caused by factors such as lack of confidence to take a haircut on bad loans or inability to take decisions without clearly defined guidelines, etc. Hence, persistent negative outcomes post every scheme launched aimed at resolving bad loans is taking away any optimism that we need to have reading into the changes effected in the previous week. However, we remain optimistic as we are now entering a timeframe where failure to resolve would accelerate provisioning requirements, which could result in banks reporting weak results in FY2018.

However, RBI has not come out with any new guidelines but has strengthened its voice to its previous guideline. It does appear that RBI is giving comfort that the existing guidelines are sufficient to handle the NPL situation on the ground. We are favourably inclined to the decisions made, especially the one which forces banks to send an executive with requisite powers to JLF meetings.

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Positive for corporate banks; first resolutions made by banks to boost confidence

We read the guidelines as another attempt to resolve NPLs declared so far. This may not be the end but directionally it is giving comfort on the seriousness accorded to resolve the issue. In general, this is positive for most PSU banks and ICICI Bank/Axis Bank amongst private banks.

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