The Reserve Bank of India's (RBI's) revised framework for the resolution of large stressed assets has the potential to herald a big change in the approach of banks to monitoring of exposures and resolution of Non-Performing Assets (NPAs), a report by global analytical company CRISIL Ratings says. If there is no success in solving the restructured loans, this can then lead to a jump in the supplies thereby removing profitability and exhausting the low level of the capital which already exists. On the positive side, the rules could speed up the resolution of stressed assets in the system.
The Joint Lenders Forum (JLF) as an institutional mechanism for resolution of stressed accounts also stands discontinued, it said, adding that "all accounts, including such accounts where any of the schemes have been invoked but not yet implemented, shall be governed by the revised framework".
The revised framework from the RBI comes at a time several large NPA cases are ongoing in various benches of the National Company Law Tribunal.
Some of the current loan restructuring rules have been criticised for helping to evergreen bad loans. Indian banks are sitting on a stressed assets pool of over Rs 10 trillion. All lenders are required to submit a report to Central Repository of Information on Large Credits (CRILC) on a monthly basis effective April 1, 2018.
"They [RBI] probably feel that you have given dispensations and if those have not achieved the objective, then let's move to a simple regime.they have tightened the regulation on the belief that early recognition and early action is probably in the best interest of banks and the underlined assets", she said, adding this is good in the long-term for the system.
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"The RBI move has come at the right hour because the asset quality pressures are near their peak and it will improve the ability of banks to transit to the new regime", the report said.
"As soon as there is a default in the borrower entity's account with any lender, all lenders-singly or jointly-shall initiate steps to cure the default", said RBI.
The lender was also able to make significant recoveries of Rs 3,020.5 crore for the quarter, with a majority of the recoveries coming from small accounts. They are also filing insolvency petitions for some of the 28 accounts which were part of central bank's second defaulter list.
Scrapping all the old schemes, it proposes that banks start insolvency proceedings against accounts with a total default amount of Rs 2,000 crores or more if a resolution plan is not implemented within 180 days of the initial occurrence of default.
The spike in NPAs is likely to be an outcome of implementation of resolution plan for large borrowers that are now under Special Mention Accounts (SMA) categories.
Under the new process, the RBI requires banks to figure out plans to resolve debts of defaulters with 20 billion rupees ($311 million) or more in outstanding debt by 1 September, or take them to bankruptcy court.