RBI on stressed assets

Kashmir Times. Dated: 6/13/2019 1:27:35 AM

The central bank's approach in the revised circular on stressed assets is welcome and needs review in all advances

The Reserve Bank of India's (RBI) revised circular aimed to reduce the Non-Performing Assets (NPAs) of the banking institutions is noteworthy and a welcome step so far as renewed efforts to course correction are initiated. These efforts of the central bank and all other banking institutions suffered a setback last year when these directions were shot down by the Supreme Court terming them as violation of set rules. This is to be noted with concern that the efforts of the RBI through February 12, 2018, to clean up the NPAs' mess in the banking institutions were not supported by the SC which struck down the circular as it was considered to be ultra vires. The fresh circular titled 'Prudential Framework for Resolution of Stressed Assets' issued by the central bank on June 7 manages to retain the spirit of the original version even while accommodating the concerns of the banks and the borrowers. The central bank has achieved a good balance between its objective of enforcing a solution of stressed assets and giving banks the room to draw up a resolution within a set timeframe without resorting to the bankruptcy process. Banks will now have a review period of 30 days after a borrower defaults to decide on the resolution strategy, as compared to the one-day norm that was in vogue previously. They will also have the freedom to decide whether or not to drag a defaulter to the insolvency court if resolution does not take place within 180 days of default. Banks had no such option ion the past. By making an Inter Creditor Agreement between lenders mandatory, the RBI has ensured that they will speak in one voice, while the condition that dissenting lenders should not get less than the liquidation value puts a floor on recovery from the resolution process. This step will also in a way protect the money advanced by the banks to the borrowers, who have defaulted.
It is worth noting that the nuanced approach of the RBI will be welcomed by both the banking system as well as the borrowers. There will be disincentives in the form of additional provision of 20 percent to be made by banks if a resolution is not achieved within 180 days and a further additional provision of 15 percent if this extends to a year. If that is the stick, the carrot is that they can write back half of the additional provision once a reference is made to the insolvency court and the remaining half can also be clawed back by banks if the reference is admitted for insolvency resolution. The new approach will give banks the freedom to explore all options before referring a defaulter to the insolvency process under the new laws of insolvency. Instead of treating banks like truant schoolchildren who need to be disciplined with the stick, the RBI has graduated to treating them like responsible adults who know what is good for them when it comes to handling defaulters, who have defaulted for one reason or the other. Of course, the RBI was forced to wield the stick originally only because banks resorted to fresh loans to make good the defaults on the defaulted loans and pushing NPAs under the carpet. It is to be hoped that they will now uphold the trust placed on them by the central bank. The RBI, anyway, retains the right to direct banks to initiate insolvency proceedings in specific cases by drawing on its powers under Section 35AA of the Banking Regulation Act. In the meantime, the central government has to assess what ails the insolvency resolution process, which has got bogged down in the case of several high-profile defaulters, the companies and names are well known in the banking system. The delays in resolution are not good optics, and the gaps that defaulters typically use to subvert the process must be plugged not only by the banking institutions but also by the regulators. It has to be borne in mind that the RBI's efforts will be useless if the banks, dejected by the long delays in the resolution process, prefer not to refer the cases to the insolvency courts.



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