Exclusive| Former RBI Deputy Governor Shyamala Gopinath pitches for stronger IBC process

Former deputy governor of the Reserve Bank of India (RBI) Shyamala Gopinath on December 21 pitched for strengthening the insolvency process.

Gopinath was of the view that the Insolvency and Bankruptcy Code (IBC) has brought about many changes in the insolvency resolution process but there is further scope for improvement.

Speaking to Moneycontrol, she said that banks need to aggressively work on recovery from wilful defaulters. Wilful defaulters are borrowers who have the ability to pay back but wouldn't do so.

“If an account is treated as wilful, banks are required to refer the matter to law enforcement agencies, and, thereafter, it is the enforcement agency that facilitates the recovery of such loans. Legal processes are also involved,” said Gopinath.

Gopinath said RBI measures, like the one which requires banks to report all large corporate credits to the central repository, is a positive one.

“This will enable banks to better manage the underwriting risk on corporate loans through better understanding of the leverage of the corporate,” the former deputy governor said.

“RBI has laid down the criteria and process for declaring a borrower as wilful defaulter. Banks are required to make a judgement and follow the process scrupulously,” said Gopinath.

The former central banker further said that RBI has brought in measures to improve the monitoring of problematic accounts.

They include red-flagging accounts, more granular classification of special mention accounts, timely identification and recognition of stress immediately upon default and initiation of corrective actions for mitigation, she said.

Rise in wilful defaults

The top 50 wilful defaulters collectively owed Rs 92,570 crore to Indian banks, as of March 31, 2022, the government told Parliament.

Also read: New RBI data shows wilful defaulters are laughing all the way away from banks

A mix of factors, including macro-economic conditions, sectoral issues, global business environment, and aggressive lending during upturns contributed to non-performing assets (NPAs), said Gopinath.

“There is better transparency in reporting NPAs now. Measures have also been taken to provide banks with the necessary tools and incentives for timely and more efficient resolution of stressed assets on balance sheets. It is necessary for banks to act in a timely manner,” she added.

The RBI decision to set up a database for loan records and penetration of credit bureaus for borrowers will help, said Gopinath.

Since this requires every bank to register the details of the borrowers with the RBI repository, it has significantly helped in mitigating the information asymmetry, said Gopinath.

Data with the Financial Stability Report of RBI said gross non-performing assets (GNPAs) of scheduled commercial banks (SCBs) fell to a six-year low of 5.9 percent in March 2022.

Going forward, Gopinath stated that the right incentives have been created both for bankers and borrowers, and if the IBC is strengthened further and decision making at all levels is expedited, there can be better outcomes.

Once a borrower is declared as a wilful defaulter, he/she is not only debarred from availing financial services from banks or other financial institutions but they may also face criminal charges levelled by lenders.

Loan write-offs

Apart from wilful defaults, banks have been writing off huge amounts of corporate loans as well.

To put things in perspective, beginning December 2016 till March 2022, 47 percent of corporate insolvency processes went into liquidation, compared with 14 percent that ended in a resolution plan, Insolvency and Bankruptcy Board of India (IBBI) data showed.

To quantify, out of a total of 5,258 corporate insolvency proceedings initiated under the bankruptcy code till March, only 3,406 have been closed. Among those closed, as many as 1,609 proceedings have ordered liquidation, while 480 have ended in the approval of resolution plans. Further, till December 2021, only 457 cases had yielded resolution plans.