Explained: RBI’s latest weapon to fight hidden big bad loans monster; here’s all you need to know

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Updated: Feb 14, 2018 11:37 AM

It is the names like Vijay Mallya and Subrata Roy that ring a bell for big corporate loan defaults in India's banking system, but the bad loans situation far worse. To tackle it, the RBI, in a late night notification on Monday, ordered a complete and immediate overhaul of the bank cleanup process.

RBI Monetary Policy, market sentiment, RBI’s Monetary Policy Committee, monetary policy, Yes Bank, Minimum Support PricesExplained: RBI’s latest weapon to fight hidden big bad loans monster; here’s all you need to know. (Image: Reuters)

It is the names like Vijay Mallya and Subrata Roy that ring a bell for big corporate loan defaults in India’s banking system, but the bad loans situation is far worse, and does not end with a couple of high-profile cases. According to the World Bank, the bad loans surged to 9.2% of the total gross loans in India in 2016 from just 2.67% in 2011, while China managed to keep it limited to 2% over the years.

By December 2017, at 9.9%, India became the fifth country with largest bad loans, according to CARE Ratings. In absolute terms, by June 30 the bad loans were worth Rs 9.5 lakh crore and by September 30, it dropped a little to 9.46 lakh crore. News agency Reuters reported the figures through RTI queries.

The reason for the drop in a rather rising figure was understood to be a result of the implementation of the Insolvency and Bankruptcy Code (IBC). It was passed in 2016, but its implementation kicked in in real terms only when the Reserve Bank of India identified 12 big corporate accounts, responsible for 25% of total bad loans, for immediate resolution under IBC last June.

Also Read: In late night notification, RBI orders immediate and complete overhaul of bank NPA cleanup

It also identified 488 other accounts that were given six months time to restructure their debt. By December 2017, about 28 more accounts were identified for resolution under IBC in the National Company Law Tribunal (NCLT).

In the meantime, the government announced a massive bank recapitalisation plan of Rs 2.11 lakh crore for recapitalisation of banks to improve their health and cleanup their books. It also took introduced Section 29A in the IBC provision to plug the loophole that allowed promoters to bid for their companies back at a discounted price.

But it did not seem enough; especially when the big bad loans monster was not out in the field but hidden in the books as the standard asset, a technical term for which is ‘evergreening’. Many banks, past two quarters, reported non-performing assets divergence from RBI’s audit, including biggest lender State Bank of India.

Also Read: RBI’s new diktat on bank default: It is time for promoters to face the heat

To cut short the already existing complexities in the whole debt-restructure system and close room for interpretations, the RBI issued a 20-page notification, subsuming 28 schemes, laying down strict and uniform framework on loan defaults.

It withdrew immediately processes like Corporate Debt Restructuring Scheme, Joint Lenders’ Forum (JLF) and Strategic Debt Restructuring Scheme (SDR), and asked banks to identify accounts as NPA immediately on default. The lenders and borrowers have been given a 6-month deadline to repay loans or face insolvency under the IBC.

The RBI has also warned banks against ‘evergreening’ or concealing the actual status of any account, and for transparency, has asked for weekly disclosures till March 31 and monthly from April 1 on the status of defaults to the RBI credit registry —  CRILC.

Also Read: Here’s how bad India’s bad loan problem is. Hint: It’s far worse than China

And once even one lender identifies an account as stressed, all lenders — singly or jointly − will have to initiate steps to cure the defaults. During the 180-day period, borrowers with an exposure 1000 crore will have a chance of upgrade only on the demonstration of satisfactory performance and when a rating agency gives at least BBB- investment grade.

For an exposure more than Rs 5000 crore, the opinion of two rating agencies will be taken into consideration and in case of difference, it is the lower rating that will hold importance. During this period, for a successful debt-restructure, the borrower should not be in default and at 20% of principal debt has to be repaid.

If in the six months duration, debt restructuring fails, within 15 days, lenders are required to file for insolvency under the IBC to NCLT. What seems like a masterstroke is RBI’s idea of borrowing the Section 29A of the IBC even for resolution under the non-IBC route.

It specifies that even if the debt restructuring is happening under the ‘Change of Ownership’ clause, all the people — wilful defaulters, defaulting promoters and related persons and companies — barred for bidding under the IBC cannot be an acquirer. There is a clear no for wilful defaulters and borrowers who have committed frauds and malfeasance.

Analysts say that the new framework not only clears deck full of confusing schemes but also presses for an early recognition of NPAs and subsequently the resolution. Critics, however, of the view that while the tightening of the noose was necessary, it will also put pressure on public sectors banks and hit their earning in coming days, and perhaps their lending capacity as well.

However, the general sentiment is that it plugs all loopholes that allowed lenders and borrowers to keep the stressed assets hidden until it was too late.

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