Talking about the RBI's revised framework in an attempt to resolve the stressed assets, R Gandhi, Former RBI Deputy Governor said with the new framework in place there could be an uptick in non-performing assets (NPAs) because what need not have been recognised as an NPA will now be recognised as one.
This will definitely impact the provisioning of banks because the moment an account is declared as NPA, banks will have to make additional provision. However, looking at the positives of such a move, is that everyone will know what exactly the problem with the bank is, he said.
As per the new framework, the lenders will have to report all special mention accounts (SMAs). The SMA accounts will have to be reported to Central Repository of Information on Large Credits (CRILC).
CRILC report will be monthly from April 1.
The Reserve Bank of India has also withdrawn the existing mechanism which included Corporate Debt Restructuring Scheme, Strategic Debt Restructuring Scheme (SDR) and Scheme for Sustainable Structuring of Stressed Assets (S4A).
The other important aspect of this framework is that the entire problems of stress will be fully accounted in the books of the banks and will be publicly disclosed, said Gandhi, adding that the bankers have not shifted focus from NPAs to stressed assets.
Gandhi believes that the nature of default is a default irrespective of whether it will be recognised as NPA or not.
Talking about the PNB case, he said the bank is expected to repay the loans of banks.
Below is the verbatim transcript of the interview:
Latha: What is the best way to solve Punjab National Bank (PNB) issue? We are given to understand by bankers that there is standoff. PNB not sure that it has to pay. Do you think the government or the Reserve Bank of India (RBI) has to step in and ask them to pay because otherwise it hangs like a cloud?
A: As of now PNB has both the legal and moral responsibility to pay off the amounts that has been invoked by the other banks with reference to the LoUs. So I would definitely expect that wiser counsel will prevail on PNB and they will pay off. The conditional payment which they are proposing is understandable from their perspective why they want to put in that kind of rider but I would think that that is a negotiating point rather than final position. I would definitely expect that finally PNB will pay off.
Sonia: What about the industry in itself because of the new framework that we have seen what kind of uptick do you see as far as NPAs are concerned? Currently it’s somewhere around Rs 8-9 lakh crore for the system as a whole. How much do you think it could rise to?
A: If you would recall, for the past several years, RBI has shifted its focus away from NPA to stressed assets because stressed asset is more important and the difference between stressed assets vis-à-vis the NPA is a regulatory forbearance which has been given which also RBI had, in a planned manner, stated withdrawing and it now completely stands withdrawn whatever forbearance was earlier given. So in that process there could be an uptick in NPA because whatever need not have been recognized as NPA until yesterday, today it has to be recognized as NPA.
So an impact of that will be to – one, on the banks to provisioning because the moment it is NPA it requires additional provisioning to be made by the banks and in due course also further if it is not properly recovered and other thing. So the provisioning cycle has been set on. That is the first major impact of the new instructions which have come from the RBI to the banks but in a way that is a right one because that way the entire world get to know what exactly is a problem with banks and accordingly the financial side or the balance sheet side is either being strengthened by infusion of additional capital or recovery or whatever. So the number increasing. I would think it is only an uptick because from the beginning for the past five-seven years we have been looking at the stressed asset scenario rather than just NPA.
Latha: I looks like asset quality review (AQR) two to me. Would you agree that this will end the problem, the poison will be out?
A: That is correct because by this the entire problems of stress will be fully accounted in the books of the banks and it will be publicly disclosed.
Latha: The RBI has also said in that circular that on first default bank should start looking to resolve - that is special mention accounts-zero (SMA-0) on the first day that party resolves. Does this look like just replacing what Sebi was trying to do by asking for public disclosure on the first day of default? The RBI has come in from the bank’s side and therefore is it the stepping stone for a much cleaner banking system going forward?
A: First of all in that respect there is no change in the instruction which was earlier and today because the matter of the default is a default irrespective of whether it will be recognized as NPA or not because NPA recognition comes after 90 days so that comes much later but even a single day default is a default only, one. Second, what the RBI has said now, earlier when it is in SMA-0 type of account, bank might have taken it little lightly because whether it is hardly five-ten days in default with an expectation that the parties will bring back the money in due time. Now to put a little seriousness in that effort, RBI has compelled the banks that the moment something is SMA-0 you should start talking with parties how they are going to confirm the repayment guidelines within due dates. So that is an expectation to put a seriousness among the parties.
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