NPA crisis: RBI does well not to water down resolution norms

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Published: June 11, 2019 12:57:09 AM

While the new guidelines on stressed assets put out by the Reserve Bank of India (RBI) do alter the timelines for a clutch of projects where resolution is under way, lenders now have more flexibility on how to deal with the asset and maximise recoveries.

RBI has also warned banks against ever-greening accountsRBI has also warned banks against ever-greening accounts

While the new guidelines on stressed assets put out by the Reserve Bank of India (RBI) do alter the timelines for a clutch of projects where resolution is under way, lenders now have more flexibility on how to deal with the asset and maximise recoveries. At the same time, the central bank has done well to reiterate that it retains the powers, under Section 35AA of the Banking Regulation Act, 1949, to direct banks to initiate insolvency proceedings for specific borrowers. This is important to ensure that big defaulters—especially willful defaulters—don’t get away. Indeed, those companies that tried to stall the insolvency process in the courts—the Allahabad High Court had declared the February 12 circular ultra vires—will find they have not gained too much by delaying the process, and that the one-day default being scrapped is a small reprieve. This is because it is unlikely there will be any other solution that banks can come up with, other than referring these accounts to the NCLT.

The central bank must be credited for not having watered down the norms and for having put in place incentives for lenders to take speedy action; RBI has also warned banks against ever-greening accounts, a common practice in the past. That it now allows bankers to classify an account as a default only after 30 days of the borrower not having serviced the loan, by scrapping the one-day default rule, would have come as a relief. This gives them a little more time to address the problem in the initial stages, though ideally bankers should be in a position to red-flag stress early on and not be ambushed by a default.

Bankers also need not necessarily choose the Insolvency and Bankruptcy Code (IBC) option if the resolution plan cannot be implemented in 210 days—including the 30 day review period. But there is an incentive to speed up the resolution, since otherwise, the account would see accelerated provisioning—additional 20% at the end of 210 days and 35% by 365 days. Once the case has been filed with the NCLT, for the initiation of insolvency proceedings, 50% of the additional provisions can be reversed and, once the NCLT admits the case, 100% can be reversed. The provisions can be reversed, also, once the resolution plan has been fully implemented, for instance, if this is achieved via a restructuring or a change in ownership outside of the purview of the IBC.

RBI has also attempted to minimise delays by asking lenders to sign an inter-creditor agreement (ICA), though this may not be easily achieved, since many of the smaller lenders are reluctant to agree to the terms. However, for decisions to be binding, they must be agreed to by 75% of lenders by value and 60% by number; in other words 100% of the lenders need not agree. The central bank has also made it clear that where there is a change in ownership, the new promoters should not be, in any way, related to the existing promoter or promoter group—whether a person, an entity, a subsidiary and so on. Of course, they should not be barred under Section 29A of the IBC either. That these conditions have been clearly stipulated, is welcomed, because there have been instances where relatives of existing promoters have attempted to regain control through related parties.

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