A Bombay Intelligence Security (BIS) officer stands guard beside Reserve Bank of India (RBI) signage outside the central bank’s headquarters in Mumbai (Photographer: Kuni Takahashi/Bloomberg)

RBI Board Members, Rating Agencies To Advise On Resolution Of Large Accounts

The Reserve Bank of India (RBI), on Monday, released broad contours of the framework it intends to follow to resolve large stressed loans on bank books, while saying that details of the plan will be released at a later date. The outline follows an ordinance passed earlier this month which empowered the regulator to direct banks on the course of action in individual bad loan cases.

Under the new framework, the regulator plans to reconstitute the oversight committee (OC) under the aegis of the Reserve Bank and also enlarge it to include more members. This is being done so that the committee can constitute benches to deal with the large volume of cases referred to it. The OC was originally created by the Indian Banks’ Association (IBA) to approve restructuring done under the Scheme For Sustainable Structuring of Stressed Assets (S4A).

The regulator said that while the two members who are currently on the oversight committee will continue to serve on it, names of a few more members will be announced shortly.

The Reserve Bank is planning to expand the scope of cases to be referred to the OC beyond those under S4A (scheme for sustainable structuring of stressed assets) as required currently.
Reserve Bank of India Release

The regulator is also re-looking at its present guidelines on restructuring for modifications “as maybe necessary”.

The central bank said that it expects rating agencies to play a significant role in the resolution of stressed assets. However, to avoid a case of ‘rating shopping’ or any conflict of interest, the rating assignment may be decided by the RBI. The regulator also plans to create a pool out of contributions from banks, which would be used to pay rating agencies for their services.

Involving rating agencies is a good idea, Abhishek Bhattacharya, head of financial Institutions and banks at India Ratings & Research told BloombergQuint. “Rating agencies can provide an external validation to the restructuring process,” he said.

For cases where resolution may be best achieved via the Insolvency and Bankruptcy Code (IBC), the RBI said that it will put in place an objective and consistent decision making process. The RBI may constitute a committee comprising of its independent board members to advise on such cases.

“Reserve Bank has already sought information on the current status of the large stressed assets from the banks,” it said in its statement.

The RBI is being quick and responsive in its NPA resolution strategy, Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services told BloombergQuint.

It is planning on expanding the size of the OC which is very important when dealing with the volume of cases that will be coming up for resolution. It has considered that the independence of the rating agency while rating a company is essential and is thus ensuring that they are paid out from a pool. This will greatly help in making the whole process transparent and will lead to better resolution.
Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services LLP

A Multi-Step Process

On 5 May, 2017, the President of India cleared an ordinance proposed by the central government amending the Banking Regulation Act, giving the RBI greater powers to deal with stressed assets. The amendment was considered to be necessary to help resolve nearly Rs 10 lakh crore in stressed loans in the Indian banking sector. Through the Ordinance, the RBI hopes to speed up decision making which has been stuck due to the reluctance of bankers to take tough calls.

Immediately after the government’s ordinance was released, the RBI too released guidelines to allow the use of S4A and strategic debt restructuring (SDR) schemes as part of the corrective action plan (CAP) devised by joint lender forums (JLFs). The regulator also revised the minimum threshold to approve a CAP to 60 percent by value of the loan and 50 percent by the number of banks in the JLF. Banks that did not want to adhere to the JLF decisions were asked to leave the JLF by selling their loan exposure.

The framework released on Monday will likely be followed by operational guidelines. Key to these guidelines will be triggers used to invoke a specific course of action such as initiating bankruptcy proceedings.

Creating committees and expanding the size and scope of the OC seem like good measures. However, we must remember that the OC is only a group that checks for compliance. The key is still resolution, for which the RBI needs to come out with a clear strategy.
Abizer Diwanji, Partner & Head- Financial Services, EY