The credit policy of last week is done and dusted, but what still holds is an interest discussion paper put out by RBI on incentivising banks to recognise stressed loans earlier and set it right before the asset goes into even more stressed areas.
Also Read: RBI draft norms for bad loans require a mindset change:SBI
The highlights of the paper are:
The RBI discussion paper is not about the existing stock of bad loans. It is an effort to save existing loans that may be decaying.
The paper tells banks to categorise loans as special mention accounts (SMA) 1, when the interest is not paid in the first month; as special mention account (SMA) 2, when interest is not paid by the 61st day. Some loans that show stresses like bouncing checks, etc, can be categorised as special accounts non-financial.
Having recognised them, the task is to get cracking early.
If a borrower comes into the SMA 1 list three times in a year, or if he enters the SMA 2 account, all the concerned banks have to set up a joint lenders' forum and formulate a corrective action plan. The plan should be ready in 30 days and signed by all concerned in another 30 days. If they fail to reach a conclusion, banks will face accelerated provisions.
For instance, provisions will double to 30 percent for a sub-standard secured loan. And for a sub-standard unsecured loan, provisions will nearly double to 50 percent.
If banks agree to refer the distressed account to the corporate debt restructuring (CDR) cell, a restructuring plan will have to be put in place within 75-105 days as opposed to 180 days as per the current norms.
An important part of the new regime is a central repository of information on large credits. This is a kind of CIBIL located in RBI where all banks have to give in all data on their SMA and NPL accounts.
RBI will also look at encouraging more distressed asset sales to asset reconstruction companies. Banks will be allowed to reverse excess provisions on NPAs sold at a value higher than net book value. Banks will also be allowed to spread their losses over 2 years, when they sell NPAs at below the book value.
RBI will also allow leveraged buyouts for acquisition of these stressed companies. The central bank assures that it will also look at strengthening the debt recovery tribunals and setting up special benches for speedy disposal of SARFAESI cases.
Former State Bank of India (SBI) chairman AK Purwar and BK Batra, deputy managing director of IDBI Bank share their views on the issue on CNBC-TV18.
Below is the edited interview transcript of AK Purwar and BK Batra on CNBC-TV 18.
Q: You have already seen the banking system go from 180 days recognition of Non-performing loans (NPLs) to a defaulter who doesn’t pay for 90 days becoming an NPL, you must know the stress in 2002 what it would have been. Now do you think that if you are forced to recognise in the 31st day and in the 62nd day, will that be a lot of stress on the banking system?
Purwar: I don’t think it will cause a lot of stress in the banking system. Banking system has to be little more watchful. And knowing the kind of monetary system they have in place, any account becoming irregular, or showing signs of defaults or irregularities immediately get reported on a monthly basis. So as far as this is concerned I don’t think that is an issue.
Q: Would you say that one of the big advantages of the paper is that there is a repository now so a borrower in one bank reported as a stressed account is known to you. So at least to that extent the generation of future NPLs will be controlled?
Batra: It certainly is a positive feature for this framework that the information system will become more comprehensive, more reliable and it will be centrally available and any banker can dip into it and find out. But I must mention that the framework which has been introduced by RBI in the discussion paper is quite comprehensive. It is covering areas from appraisal to early recognisation to resolution, to recovery to several other areas.
Q: Which is the easiest to implement or interesting point that you find in the paper?
Batra: The basic characteristic of this framework is that it has been made mandatory now and with tighter timelines for banks to report all defaults, all kinds of stress and they have very rightly categorized it into non-financial, 30 to 60, 60 to 90 days and as AK Purwar very rightly said, banking system today has the technological capability to throw up this data and we look at this data on a day-to-day basis. So generation of data and reporting of data is not going to be as much a solution.
Q: You said timeline. In 60 days at a time like this when the economy is under fairly serious stress you have to have a joint lender forum for all accounts over Rs 100 crore, is that timeline possible, will all banks have the bandwidth to send banking representatives to probably thousands of such cases and ensure that they are implemented in 60 days?
Batra: I must admit it is quite tight though this is one of the intent of the framework that the recognition should be early and resolution also should be early. Recognition can be early but resolution would definitely pose a challenge particularly when the numbers would be large. When we are looking at covering all the accounts more than a certain threshold, the numbers are going to be large and therefore it is going to take time for the system to get stabilised.
May be we will find ways and mechanisms to adhere to these timelines but it is going to take a little while to make them stable and make them work within the timeframe.
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