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RBI To Deal With Bad Loans With ‘Firmness’ And ‘Pragmatism’

RBI also eased norms under the Scheme for Sustainable Structuring of Stressed Assets.



Reserve Bank of India (RBI) signage is displayed at the entrance to the bank’s headquarters in Mumbai (Photographer: Kuni Takahashi/Bloomberg)
Reserve Bank of India (RBI) signage is displayed at the entrance to the bank’s headquarters in Mumbai (Photographer: Kuni Takahashi/Bloomberg)

Reserve Bank of India Governor Urjit Patel on Tuesday hinted at a subtle shift in the way it deals with bad loans. Speaking at the press conference after announcing the monetary policy, Patel said that the RBI will deal with bad loans with "firmness"and "pragmatism."

The NPA situation is an important issue for the RBI in India. We will deal with the situation with firmness, but also with pragmatism, so that the economy does not feel any lack of credit to support the growth in the economy.
Urjit Patel, Governor, Reserve Bank of India

Bad loans across banks have surged to Rs 6.3 lakh crore as of June 2016 after an asset quality review conducted by the RBI last year. Under Raghuram Rajan, the RBI had asked banks to clean up their balance sheets by March 2017.

While Patel didn't indicate any change in the timeline of the clean up, he said this will need "skill" and "endeavour to resolve".

"There are four stages. The identification, recording, and reporting of this subject has been done satisfactorily. But the resolution, which is the fourth leg, is something which we need to work more (on)," said Patel.

"There are many reasons that led to this situation, but now helping banks to deal with the situation is of utmost importance for the country," he added.

Tweaking S4A Norms

As part of its policy announcement, the RBI eased norms under the Scheme for Sustainable Structuring of Stressed Assets (S4A). Following representations from banks, the RBI said that the proportion of debt that is considered as sustainable will be treated as a standard asset.

“Banks that have taken up cases for resolution under the S4A have represented that the asset classification norms under the S4A may be reviewed to make the scheme more effective. Accordingly, it is proposed to allow that portion of debt determined to be sustainable to be treated as a standard asset in all cases, subject to certain conditions,” said the RBI.

Until now, the RBI had asked banks to maintain the same classification as the one assigned to the account before the restructuring of the debt. Allowing banks to maintain the sustainable part of the debt as a standard account will give lenders more incentive to use the S4A scheme as it will reduce the build-up of bad loans.

The measure announced to tweak the S4A scheme is a big positive for banks, said NS Venkatesh, executive director of Lakshmi Vilas Bank.

It is a means to reduce stress in the banking system, and it paves the way for early resolution of bad loans. Additionally, the classification of the sustainable portion of a stressed loan as standard will free up capital for banks to use for lending and investments.
NS Venkatesh, Executive Director, Lakshmi Vilas Bank