Defending the Reserve Bank of India’s (RBI) norms on resolution of banks’ non-performing assets (NPAs), or bad loans, announced in February, RBI Deputy Governor N.S. Vishwanathan on Wednesday said these are outcome-oriented and provide banks the flexibility on deciding the contours of resolution. Delivering a lecture titled “It is not Business as usual for Lenders and Borrowers” at the National Institute of Bank Management in Pune, he also cautioned banks on being overcome by a herd mentality in seeking to grow retail credit and the personal loan segment as a way out of their problem with corporate bad loans.
As per the RBI’s revised framework on NPAs, banks are required to classify even a day’s delay in paying loan instalments as a default. “Some concerns have been expressed that the 1-day default clause is onerous,” Vishwanathan said, according to the speech copy uploaded on the RBI website. “These concerns are not well founded. For cash credit account, the 30-day trigger has been retained. For term loans, where the repayment schedules are predetermined, borrowers need to and indeed have enough notice to arrange funds in time. It is a behaviour change in repayment of credit that has to come about,” he said. “The date shows that a large number of borrowers, even some highly rated ones, have failed on the 1-day default norm. This has got to change. If borrowers fail to pay on the due date because of a cash flow problem, banks should see that as an early warning indicator warranting immediate action,” he added.
The RBI official also said the revised norms provide as much flexibility as possible to lenders and the stressed borrowers so long as a credible resolution plan is implemented within a specified time frame. “If lenders and the stressed borrowers are unable to put in place a credible resolution plan within the timelines, then the structured insolvency resolution process under the IBC (Insolvency and Bankruptcy Code) should take over,” he said.
Vishwanathan cautioned banks that there were risks as well in expanding retail credit, which needed to be properly assessed, priced and mitigated. “There appears to be taking hold a herd movement among bankers to grow retail credit and the personal loan segment. This is not a risk-free segment and banks should not see it as the grand panacea for their problem riddled corporate loan book,” he said.
The accumulated NPAs in the Indian banking system have crossed the staggering level of Rs 9 lakh crore. The RBI has decided to do away with the Joint Lenders’ Forum (JLF) as an institutional mechanism for resolution of stressed accounts. Banks have represented to the RBI for relaxing the norms issued under the revised framework. Industry too has requested for relaxation.
According to the Association of Power Producers (APP) last month, the government proposes to recommend that the RBI make some relaxation in its norms on NPAs, failing which up to 70,000 MW of power projects would go under bankruptcy proceedings.