As the saying goes, in family feuds what’s important is not who won, but that nobody lost. Perhaps, the wise men at the Reserve Bank of India (RBI) took recourse to the above logic and, eventually blinked, easing its stringent bad loan resolution norms last Friday — more than a year after it declared an all-out war on errant borrowers and bankers.
By taking a step backwards — yielding to stakeholders’ pleas to dilute the contentious February 12 circular — the RBI and the government hope to leap two steps forward on the assumption that the revised framework will somehow enforce good behaviour among defaulting borrowers and streamline credit discipline and good lending practices among banks.
Experts believe the revised framework strikes a balance between tight regulation and avoiding inordinate delays in resolving bad loans, but all agree that the ongoing NPA clean-up exercise will be delayed by another 2-3 years.
“The revised framework is credit positive, because it brings back the focus on the need for timely resolution of such assets and the buildup of loan loss provisioning against those assets. Extension of the circular to NBFCs will help align the loan loss provisioning norms for the large stressed accounts of NBFCs with commercial banks. Nevertheless, the slower-than-expected progress under IBC remains a key hurdle to the timely resolution of stressed assets. The cleanup of the bank’s balance sheets could therefore still take another two or three years,” said Alka Anbarasu, vice president, Financial Institutions Group, Moody’s Investors Service.
The asset quality review started in late 2015 helped banks present a true and fair picture of their balance sheets and bad loans, but RBI’s subsequent high-handedness via the February 12 circular, which mandated one-day defaults and stringent provisioning, choked credit growth and snuffed life out of banks, NBFCs and MSMEs.
The move was akin to destroying a village in order to save it, though in the end, the RBI couldn’t justify its strengthened supervisory measures.
Everything that could go wrong with our banks has gone wrong since lenders were lax in preempting asset quality slippages. No loan turns bad overnight and without letting distress signals. It’s not that there were no regulations to identify them, but the collective inaction of statutory auditors, bank management and the banking regulator led to a pattern of ‘extend and pretend’ practices.
The central bank’s supervisory role proved ineffective in its own backyard with bad loans spiralling in excess of Rs 10 lakh crore. Sadly, both the RBI and the Ministry of Finance woke up too late and their belated reactions have seemed like locking the stable after the horses have bolted.
In the past year, despite the February 12 circular and the Insolvency and Bankruptcy Code (IBC), the success rate of bad loan clean-up operations have been far from the desired levels. Still, industry watchers remain optimistic that the diluted stressed asset resolution norms will somehow do what couldn’t be achieved until now.
“The new prudential framework is a breather for stressed accounts, where resolution plans were under implementation but had to be referred to the IBC because of not being completed in 180 days. One of the key beneficiaries will be stressed power sector assets that were operational and on the verge of being referred to insolvency proceedings under the IBC. These are estimated at Rs 1 lakh crore and banks were staring at significant haircuts on many of these,” said Krishnan Sitaraman, Senior Director, Crisil Ratings.
The revised regulations stipulate additional provisioning of 20-35 per cent in a phased manner beyond what has already been made, where resolution has been delayed beyond 210 days from default. Clearly, this will help banks in improving profitability.
But, additional provisioning can be written back either once the resolution plan is implemented or upon filing and admission of the stressed accounts under IBC. That is an incentive for lenders to go for quick decisions.
“The revised framework provides much needed clarity on the way forward in stressed assets resolution after the Supreme Court had annulled RBI’s previous circular of February, 2018. It should help reduce the stockpile of gross NPAs further over the medium-term,” said Vydianathan Ramaswamy, Associate Director, Crisil Ratings.
A balanced framework
Experts believe the revised framework strikes a balance between tight regulation and avoiding. inordinate delays in resolving bad loans, but all agree that the ongoing clean-up exercise will be delayed by another 2-3 years.
According to Moody’s, the revised framework is credit positive, because it brings back the focus on the need for timely resolution of such assets.