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In late night notification, RBI orders immediate and complete overhaul of bank NPA cleanup

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RBI Monetary Policy, market sentiment, RBI’s Monetary Policy Committee, monetary policy, Yes Bank, Minimum Support Prices In a late-night notification, RBI orders an immediate and complete overhaul of bank NPA cleanup. (Image: Reuters)

Late Monday night, in a notification, the Reserve Bank of India (RBI) announced a complete overhaul of the stressed asset resolution framework by immediately withdrawing existing schemes and asking lenders to resolve defaults within 180 days. Further, the central bank asked that starting February 23, all banks will identify defaults weekly make a disclosure every Friday to the RBI credit registry.

In a 20-page notification issued on Monday, the RBI said that it is substituting the existing guidelines with a  “harmonised and simplified generic framework” for asset resolution in view of the enactment of the Insolvency and Bankruptcy Code (IBC). The RBI has withdrawn existing norms such as Corporate Debt Restructuring Scheme, Joint Lenders’ Forum (JLF) and Strategic Debt Restructuring Scheme (SDR).

The RBI has also warned lenders of “stringent supervisory” if they take any action with an intent to conceal the actual status of the accounts. The RBI has asked lenders to identify stress in loan accounts immediately on default and classifying stressed assets as special mention accounts (SMA). And once a lender identifies a default, all lenders − singly or jointly − will be initiating steps to cure the default.

The RBI has issued a 180-day timeline for stressed asset resolution for all lenders for the accounts having exposure more than Rs 20 billion (Rs 200 crore) beginning March 1, 2018. And if lenders fail to resolve the stressed account within the 180-day deadline, they will be required to file insolvency application, singly or jointly, under the IBC within 15 days of the deadline.

In cases of accounts having exposure more than Rs 50 billion (Rs 500 crore) will require two independent credit evaluation by credit rating agencies authorised by the RBI, and in case of conflict of opinion, the lower rating will be taken into consideration.

The central bank also laid down clearly that the lenders are required to establish that the acquirer of the stressed asset under the insolvency is not a person disqualified under the Section 29A of the IBC law. The Section was included in the IBC law in the winter session after it was brought in through an ordinance route to bar wilful defaulters and defaulting promoters from bidding during the insolvency process.

Siby Antony of Edelweiss Asset told CNBC-TV18 that that RBI’s decision to issue new framework is a “great move” as it withdraws more than 20 circulars that were “very confusing” and had “a lot of conditions”. He, however, said that the condition of 100% of lenders participation as against 60% earlier under the JLF may be a harsh condition. He opined that it may lead to more companies going to insolvency.

Krishnan Sitaraman of the CRISIL said that due to the new framework, Public Sector Banks’ earnings will be impacted and hence, the banks will be under pressure. Principal Economic Advisor Sanjeev Sanyal said that if any unintended consequence arises, the system will respond to it.

The RBI, however, clarified that the new framework is not applicable for accounts against which the insolvency proceedings have already been implemented. So far, the RBI has identified nearly 40 accounts with huge corporate defaults, which have been or are being taken to the National Company Law Tribunal (NCLT).

In June, the RBI had issued a list of 12 accounts for immediate resolution with an exposure of 25% of the total bad loans and in December identified about 28 others for the insolvency proceedings.


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