MUMBAI: The Reserve Bank of India (RBI) late on Monday scrapped all its previous stressed assets resolution tools, including the Joint Lenders Forum and Strategic Debt Restructuring, to streamline the resolution framework.
Banks will now adhere to an overarching system dictated by the Insolvency and Bankruptcy Code (IBC) to resolve bad loans. From hereon, lenders will also have to identify incipient stress in loan accounts, and classify stressed assets as special mention accounts (SMA) if the principal or interest, either wholly or partly, is overdue beyond 30 days.
Analysts say the move will stem accumulation of NPAs as early identification will help in better recoveries. Currently, loan recovery rates are rather poor at 25.7 cents to a dollar as of 2016, as opposed to 89.7 cents in Singapore.
According to the RBI, the new framework will not impact existing loan resolution and lenders can continue to pursue cases as per earlier instructions. But going forward, if a loan account is marked stressed by a bank, other banks (of the consortium) have to acknowledge and start the resolution process within 180 days following the default.
The RBI will monitor defaulting accounts in excess of Rs 5 crore on a weekly basis, perhaps to minimise damage. A large part of the prevailing $150 billion NPAs are due to evergreening of bad loans by banks. Early detection of defaulting accounts will help banks lower NPAs and provisioning thereof. For defaults above Rs 5 crore, banks will have 180 days to come up with a resolution plan, or the account will have to be referred to the IBC within 15 days.
Divergence on quantum of NPAs to be bridged
Close monitoring by the regulator will also ensure banks and RBI are on the same page with regard to the definition of bad loans. The latest RBI audit of private and public lenders showed that banks’ classification of NPAs and provisioning thereof significantly diverged from that of RBI’s practice. Following the audit, banks are being forced to reclassify NPAs