In March, RBI Governor Dr Urjit Patel said the central bank was ready to be the Neelkantha consuming poison, but the Brahmasthra was launched much before, February 12 to be precise, or on the day of Shivarathri. The circular was considered potent, as it knocked down all existing debt restructuring schemes, besides imposing harsh regulations including recognition of NPAs within a day after debt default. But bankers feel the regulator jammed the dagger in their back, just when the slate appeared clean. If banks were to comply with the new framework, a staggering `2 lakh crore worth stressed loans will head to the bankruptcy court, or are destined to the scrap heap in the absence of a resolution.
The Indian Banking Association believes the new framework affects credit cycle and asset quality due to higher provisions, even as half of the state-run banks are already in the ICU for poor track record. Banks sought relief, as not all defaulters are wilful like power producers who are facing difficulties with discoms.
Or take steel companies that are in a pickle due to volatile global market conditions and over supply from China. As a result, Indian steel makers who plonked down billions reached a point of no return, compelling banks to take steep haircuts. These assets may still hold high value, and a rushed fire sale just to comply with insolvency norms could prove harmful for lenders.
The RBI may not be out of its depth tightening norms, but the onus is squarely on the regulator to ensure that the access to credit for those in need, particularly SMEs, doesn’t dry up. Unlike large firms, SMEs cannot access alternate channels like corporate bond market and ensuring their survival is essential as they are the backbone of the Indian economy comprising over 90 per cent of the total corporate tax pool and also the largest employers. The zero tolerance on stressed assets will expose the sensitive underbelly of SMEs, which should be avoided at all costs.