War on bad loans faces stress

As every JLF decision vetted by respective bank board, sticking to RBI timeline tough

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Despite the Reserve Bank of India’s (RBI) attempt to put in place a system for early detection and resolution of stressed assets, bankers say that since every joint lender forum (JLF) decision is vetted by the respective bank board, it becomes difficult to stick to the regulator’s timeline.

Banks are required to form a JLF when repayment in an account is due over 61 days, and is called a special mention account (SMA-2). As per RBI directives, once a JLF is formed, banks must formulate a corrective action plan (CAP) within 45 days.

The process, however, gets delayed as the bank boards do not meet too often and preparing a CAP report as well takes time, say bankers.

Boards of larger banks, like Bank of Baroda and Punjab National Bank, meet once a month. It’s in the case of smaller banks, where the boards do not meet regularly.

The frequency of meetings at larger banks, however, depends on the amount of the new business that the banks have generated in the period which needs board approval.

Union Bank of India CMD Arun Tiwari said, “Even though this delays the JLF decisions on the revival plan, this is a procedure we have to follow. Any decision by a bank to extend credit or change the loan terms needs board approval.” The problem is more acute in the case of a smaller banks that do not hold board meets regularly, he added.

According to a senior PSB official, though the time to arrive at a CAP was raised to 45 days from 30 days earlier, it is insufficient as banks have to prepare a detail report on the JLF proposal and submit it to the board. “Bank boards may not always agree on what has been agreed upon by the lenders’ forum and it takes longer to convince the merit of the proposal to the board,” he added.

According to the Banking Regulation Act, not less than 51% of the total number of members of the board of directors of a bank shall consist of people who shall have special knowledge or practical experience in accountancy, agriculture banking, economics and finance. Of that, 51% directors, not less than two directors, shall have special knowledge or practical experience in respect of agriculture and rural economy, co-operation or small-scale industry, the Act says. In case of private sector banks, the boards are constituted by the promoters or shareholders.

“Even the corporate debt restructuring (CDR) cell takes at least 90 days from conducting the techno-economic viability study (TEV) to decide on the package and get it approved by an independent evaluation committee (IEC). How can a JLF rectify an account in 45 days?” he said.

According to PNB executive director Ram Sangapure, the only relief for banks comes when the JLF decides to recommend restructuring of a stressed asset in the CAP. “In case of JLF restructuring or a CDR referral, the time to implement is 90 days,” he said.

Last month, SBI chairman Arundhati Bhattacharya had said that the problem arises when banks decide something at JLF meet and are unable to convince the board that it is the right way forward. “It is about the board being convinced that this is the right way and then taking a view based on their risk appetite,” she had said.

Last year, RBI had asked banks to classify loans according to its repayment overdues. Owing to that, joint lenders’ forums (JLF) were formed to find a corrective action plans (CAP) for stressed loans.

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