Bad loan resolution: Banking on RBI’s new framework

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Published: February 20, 2018 5:50:39 AM

The idea to do away with CDR, SDR, S4A, etc, is commendable, as these provisions had become routes used for camouflaging the tainted part of the loans

Bad loan, Bad loan resolution, NPA issue,  bank recapitalisation, Insolvency and Bankruptcy Code, IBC framework, CDR, corporate IndiaThe same held for bank recapitalisation, when it was pointed out that it was the responsibility of the government to capitalise PSBs as they owned them.

The major problem with tackling the NPA issue is that you are ‘damned if you do and damned if you don’t’. This is the challenge RBI or the government faces when it announces any measures to put things in order. When the Insolvency and Bankruptcy Code (IBC) was not there, the lament was that nothing effective was being done, and that there was some modicum of courage missing in the system. Once it came in, the reality hit the corporate sector that if default issues were not resolved, then they would have to pay for it with the ultimate threat being of liquidation. This had the corporates complaining that it was too harsh. Escape routes, however, did exist, with various prevailing schemes of RBI being in force such as CDR, SDR, S4A, etc. Such measures helped to kick the can.

The same held for bank recapitalisation, when it was pointed out that it was the responsibility of the government to capitalise PSBs as they owned them. When capital was to be infused, critics were quick to retort that the inefficient banks should not be capitalised and that taxpayers’ money was being wasted by good money chasing bad banks.What should the government do?

The latest move by RBI to get in the new revised framework to tackle NPA resolution has met with similar opprobrium. The idea to do away with CDR, SDR, S4A, etc, is commendable, because with a plethora of measures of reconciliation which were not quite able to deliver the results, there was no point in having a series of such schemes. They have, over time, become routes used for camouflaging the tainted part of the loans. It is much simpler to lay down certain standardised ground rules for addressing the issue of NPAs in a time-bound manner, which is important so that the resolution process is quick.

What does this new approach do? It says that for loans above Rs 5 crore, there has to be a regular monitoring of such exposures where defaults on repayments or interests are slotted into three buckets of three 30-day tranches. This has to be reported to the central repository every week/month, as per the norms laid down for being in default or SMA, respectively. There can be no argument on this norm as it will ensure that there is accountability among lenders.

Next, RBI says that every lender should have a board-approved plan for resolution of stressed assets. This makes it easier that once there is a default with respect to any borrower, all the lenders get to know of it and seek to resolve it based on the options of regularisation of payments, restructuring, change of ownership, sale of asset, etc. By having such rules in place, it makes it less ambiguous, which will make banks take action rather than worry about whether they are doing the right thing or not.

The resolution plans so formulated are to be complete in all respects and agreed upon by the lenders. If the account is large, then there needs to be an opinion given by credit rating agencies for the residual debt. The process now becomes transparent and would make bankers feel more comfortable. This is a good move as otherwise banks would have an interest in the implementation of the plan as they were involved in such lending. By getting an independent agency to give a verdict, this additional pressure would not be there on bankers.

The notification says that for amount higher than Rs 2,000 crore as of March 2018 under any of the existing schemes for restructuring, these cases have to be resolved in 180 days. Further, in case resolution plans of large accounts are not implemented as per these timelines, lenders shall file insolvency application, singly or jointly, under the IBC within 15 days from the expiry of the said timeline.

Are these measures drastic? From the borrowers’ point of view, it may be interpreted as being a bit hard. But from the standpoint of sanitising the banking system, clear-cut policy guidelines are required to ensure that the efficacy of NPA resolution process culminating with the IBC framework is robust. There would, however, be some disruption caused as these cases are expedited with all such lending being scrutinised closely by banks. In all such resolution policies, there is always a case made out that such measures could deter risk-taking ability of enterprise. But, there is also the counter argument that if there are rules relating to lending and repayment, they have to be honoured or else the credibility of the system gets affected. The balance could hence tilt more towards banks rather than the borrower.

It must be pointed out that RBI has been exhorting large borrowers to move over to the debt market to meet their requirements rather than the banking system. The practice of lazy borrowing is prevalent in corporate India, where it becomes easier to borrow from the banks than the market where the terms of engagement are tougher due to relationships built with banks. As a corollary, the market is more demanding and requires greater care to be taken when investing money and hence, in a way, sieves out the best.

There has always been a need to plug a lacuna in the system of the IBC where companies and banks were able to take shelter in the various other reconciliation schemes that were in vogue. This needed to be plugged to give more teeth to the IBC. These different schemes still gave scope for evergreening of loans, which has now been stopped with the mower now being put in motion. This should definitely give more confidence to bankers as well as other stakeholders which were overdue. At the margin, there could be some companies that have entered the NPA zone due to pure economic adversity. But they would have to go through the said laid-down resolution process; and while they could get affected negatively, it could be considered as the collateral cost, which is unavoidable when there is any bold reform.

Will NPAs now rise? There would be an increase in magnitude, though the numbers would be a hard conjecture. At the margin, the cleaning-up operation involving higher provisioning will hurt for some more time, but it would be worth the pain and make the process complete. Companies and banks would henceforth also be more discreet in the market, which will help strengthen the system in the medium run.

Author is Chief economist, CARE Ratings, author of Economics of India: How to fool all people for all times. Views are personal

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