Ordinance Gives RBI Sweeping Powers For Bad Loan Resolution
Following amendments to the Banking Regulation Act, RBI can issue directions to banks for resolution of stressed assets.
An ordinance to amend the Banking Regulation Act has given the Reserve Bank of India the power to take decisions on resolution of individual bad loan cases.
The ordinance, cleared by the Cabinet on Wednesday, was approved by the President on Friday morning.
The Central Government may by order authorise the RBI to issue direction to any banking company to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.The Banking Regulation (Amendment) Ordinance, 2017
The ordinance further says that the “RBI may, from time to time, issue directions to banking companies for resolution of stressed assets.”
A former RBI official, who spoke on the condition of anonymity, said that on the face of it asking the regulator to take decisions on bad loans could prove to be a conflict of interest. However, it must also be acknowledged that the bad loan problem is severe and something was needed to break the cycle, said this person. He added that the RBI still has a reputation of great integrity, which may limit finger pointing at decisions taken by it.
KC Chakrabarty, former deputy governor of RBI said that further clarity is needed on the role of the RBI. He, however, added that the regulator’s involvement in resolving bad loans does not attack the root of the problem.
We still need to clarify what will be the nature of the directions that the RBI will issue when dealing with stressed loans. We have read somewhere that only the top NPA cases will be targeted. Why is that? If there is an epidemic in a village, you do not just treat five of the people there. You must treat everyone. To meaningfully deal with the NPA crisis, we must understand the reason behind NPA and devise a strategy that will work around the problem.KC Chakrabarty, Former Deputy Governor, RBI
With the Ordinance passed, the RBI will now put out a detailed framework for the new resolution plan, said a person familiar with the process.
This person explained that the likely resolution process will involve a time-bound structure within which stressed assets have to be resolved. Banks and the company concerned will be asked to come up with a decision within a specific time frame, the person said.
If banks can't act in a timely manner owing to any delays, then a committee, which will have some involvement of the RBI, will take a final call on the resolution plan for that company, the person quoted above said. In most cases, this would be done through the Bankruptcy Code, the person added.
Bankers said the formation of such committees will help lenders take decisions without a fear of prosecution.
“The laws allowing RBI to issue directives were always there. We feel that this ordinance is just an advisory. The creation of committees, however, will be helpful since there will be a second voice validating our decision. It abates the fear of prosecution by investigative agencies,” said Papia Sengupta, executive director, Bank of Baroda.
Sunil Srivastava, deputy managing director, State Bank of India, agreed that the “oversight committees” will give banks a lot more confidence when taking a commercial call on stressed assets.
According to the person cited anonymously earlier in this report, each committee may have two or three members including current and former RBI officials. The person added that the committee’s will seek views from rating agencies to decide on the best way to move ahead with an account.
The idea behind the new framework is to resolve 40-50 of the large stressed cases over the next six-nine months, said this person while adding that once the RBI takes a decision, all banks will be required to adhere to it.
This is an action in the right direction, said Srivastava. “Ideally in a market-led economy, it should be the market that determines any decisions. Unfortunately, we haven't reached that kind of development in the market,” he said.
Who Could Get Impacted?
Firms that may be impacted by the new rules are those which have large amounts of debt and are either already tagged as NPAs or are in the restructured category. Many of these firms are concentrated in the infrastructure, power and steel sectors, where debt levels are well in excess of what their cash flows can service.
A February Corporate Health Tracker report from brokerage house Credit Suisse had pointed out that stress in steel and power remains high. It added that stress in telecom is also on the rise.
“While stress is spread across sectors, metals, utilities and infra and construction continue to contribute ~50 percent of the total stress of Rs 15 lakh crore,” the report said.
The report had noted that 41 percent of debt tracked by them remains with companies with interest coverage ratio of less than one. The interest coverage ratio represents the ability of a firm to service interest from its earnings.
Data from Credit Suisse shows that 65 percent of steel firms had an interest coverage ratio of less than one at the end of the December 2016 quarter. 67 percent of power companies and 45 percent of telecom firms also have an interest coverage less than one.
