RBI stands firm on new NPA rules

The RBI stood its ground despite shrill cries from bankers and bureaucrats to dilute the debt resolution norms introduced on February 12.

MUMBAI:  The RBI stood its ground despite shrill cries from bankers and bureaucrats to dilute the debt resolution norms introduced on February 12.On Wednesday, RBI Deputy Governor N S Vishwanathan gave a point-by-point rebuttal to concerns expressed by lenders, which indicated that there wouldn’t be changes in the new framework. Reason: The new rules are to ensure that past mistakes of the previous credit cycles aren’t repeated. “We don’t want to end up in a similar situation a few years down the line,” said Vishwanathan, speaking at the National Institute of Banking Management in Pune on Wednesday.

“Such timely intervention should be second nature to a bank. Similarly, paying dues on time should be the natural behaviour expected from a borrower. The revised framework seeks to inculcate such a behaviour in both,” he said.The February 12 circular knocked down all existing debt resolution schemes and tightened NPA norms, which market watchers say could toss `2 lakh worth loans straight into bankruptcy proceedings. Bankers are scurrying all over saying the revised framework will upset the credit cycle and asset quality due to higher provisions. 

Deputy Governor N S Vishwanathan (File Photo | Express Photo)
Deputy Governor N S Vishwanathan (File Photo | Express Photo)

According to Vishwanathan, concerns regarding the one-day default rule were unfounded. “The data shows that a large number of borrowers, even some highly rated ones, have failed on the one-day default norm. This has got to change,” he said clarifying that an account will become NPA only when it is overdue by more than 90 days and that SMEs are exempted from the norm.

As for the 180-day deadline that gets triggered on the 91st day of default, which the IBA wants extended by another 30 days, the RBI Deputy Governor said, delay in payments was a lagging indicator of the stress in the company, which bankers should be aware even before the default.  “Lenders need to be proactive in monitoring their borrowers and be able to identify financial stress using a combination of leading indicators and renegotiation points in the form of loan covenants rather than wait for a borrower to default. Such early identification of stress and loan modifications in response would provide sufficient time for lenders to put in place the required resolution plan,” he said.

Banks told to exercise caution over retail credit
The RBI on Wednesday asked banks to exercise caution while lending retail loans like buying cars or homes. “There appears to be taking hold a herd movement among bankers to grow retail credit and the personal loan segment. This is not a risk-free segment and banks should not see it as the grand panacea for their problem-riddled corporate loan book,” N S Vishwanathan said, adding, there were risks here too that should be properly assessed, priced and mitigated.

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