1. JLF to be streamlined further: RBI

JLF to be streamlined further: RBI

If there is a problem, it is important to recognise it and address it quickly rather than pretending and extending, said SS Mundra, deputy governor, RBI

By: | Mumbai | Published: September 24, 2015 12:17 AM

The Reserve Bank of India (RBI) is trying to improve the joint lenders’ forum (JLF) mechanism and will soon release a discussion paper on it, RBI deputy governor S S Mundra said on Wednesday.

Speaking to reporters on the sidelines of the CII CFO summit here, Mundra said RBI is keeping JLFs under a constant watch. “Individual cases have been picked up at random, whether JLF or 5/25 (refinance), our team goes through them. We are trying to bring in some more improvements in the mechanism. Very soon a paper will be out for further refinement in the mechanism,” he added.

Mundra said the asset quality in the banking system and corporate leverage are matter of concern. “A simple message is if there is a problem, it is important to recognise it and address it quickly rather than, what we have always been telling, pretending and extending,” he said.

Mundra added that while the central bank has taken away the forbearance, it has given options like asking the lender to form a JLF or using the 5/25 scheme or strategic debt restructuring, where applicable.

In February last year, the RBI had directed banks to provide credit information of their exposure above Rs 5 crore to the Central Repository of Information on Large Credits (CRILIC). As soon as an account is classified under SMA-2 (repayment overdue of 61 days), banks have to form a lenders’ committee called JLF to look into the problem and for early resolution of the stress in the account.

Then, in December, RBI allowed banks to refinance existing infrastructure projects under the 5/25 model provided where the repayment period was extended to a maximum of 25 years with the loan getting refinanced every five years.

Following this, banks have stretched debt repayments of several companies, including the Adani group and Jaypee Infratech.

Mundra also said that a major concern today in the global arena is the leverage of corporates, which has enhanced substantially in the last few years.

“As of today, in the global regulatory forum, a very serious debate that is going on is whether there should be a favourable tax treatment for debt versus equity, if that has been an incentive for companies to go for
more debt rather than equity,” he said.

He added that another cause of concern is the multiple-layer structure of companies, where you have a holding company and several step-down subsidiaries.

“If you are leveraging at the first level of equity with debt, and at every subsequent level, the debt is assuming the colour of equity and getting multiplied geometrically, and after three or four steps, there is a trickle down impact,” he said.

On startups, Mundra said there is pressure on promoters to scale-up too fast without creating the supporting control and compliance and, therefore, there is a need to exercise some caution.

“One thing, although I am not directly concerned with it, is the kind of valuations. I don’t question whether the valuations are right or wrong. Rightfully or wrongfully, sometimes I carry the worry whether it will be like a game of ‘pass the parcel’, and when the music stops, the last person will be left holding the parcel,” he said.

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