RBI Starts To Flesh Out Its Stress Resolution Plan, One Meeting At A Time

Armed with powers to intervene directly in the resolution of stressed debt, the Reserve Bank of India (RBI) has spent the past week meeting with stakeholders to give shape to its plan.

Exactly a week ago, on May 22, the regulator released a broad framework to try and help resolve nearly Rs 10 lakh crore in stressed assets on the books of Indian banks. The plan depends heavily on three pillars. This includes the setting up of committees to help banks take decisions, bringing in rating agencies to ensure the best resolution decision is taken, and strengthening the asset reconstruction sector.

Since that framework was outlined, RBI deputy governors Viral Acharya and NS Vishwanathan have met with officials from rating agencies, asset reconstruction companies (ARCs) and stressed asset funds, said four people who have been part of different meetings.

The meetings have been focused on understanding the issues faced in the resolution of stressed debt and ways in which practical problems can be resolved.

In one such meeting, the regulator suggested that it would look at ways to allow freer flow of information between banks and rating agencies regarding stressed accounts, according to two people quoted above, who spoke on the condition of anonymity. At present, rating agencies are not privy to all the information related to these accounts. For instance, the Central Repository of Information on Large Credits (CRILC) is only available to banks and the RBI.

Acharya, in a speech in February, proposed that rating agencies be brought in to rate potential restructuring plans to judge which proposal will help improve a stressed firm’s rating profile the most. In the outline released last week, the RBI added that rating agencies may be picked by the regulator and paid out of a central pool to prevent ‘rating shopping’.

Speeding Up Sales To ARCs

The RBI is also looking for ways to speed up sales to ARCs and stressed debt funds. India has at least a half a dozen functional reconstruction companies but sale of bad loans remains slow.

In a meeting with ARCs and stressed debt funds on Friday, the RBI discussed the possibility of allowing reconstruction companies to hold more than 26 percent equity in a stressed company upon the conversion of debt, said the third person quoted above.

In a notification issued in January 2014, the regulator said that ARCs can convert debt into equity in a defaulting company up to a limit of 26 percent. While this allowed for some level of control in defaulting companies, it is less than the 51 percent equity or more which banks are allowed to acquire under schemes like Strategic Debt Restructuring (SDR).

Representatives of ARCs have also asked the RBI to encourage banks to continue providing non-fund based support to accounts that may have been sold to ARCs, the third person quoted above said while speaking on the condition of anonymity. This person explained that while reconstruction firms can raise fresh equity or debt to pump into a stressed account, products such as letters of credit (LCs) cannot be issued by them.

To push banks to take decisions quicker, the RBI is looking to expand the overseeing committee (OC) mechanism by adding more members and allowing it to oversee restructuring cases outside the scheme for sustainable structuring of stressed assets (S4A). The RBI has also proposed to create an advisory committee consisting of independent members on the regulator’s board.

These committees are expected to help banks take tough commercial decisions without fearing the scrutiny of investigative agencies such as the Central Bureau of Investigation (CBI) and Central Vigilance Commission (CVC).

The exact constitution of these committees is yet to be detailed by the regulator.

The Missing Link

Earlier this month, the government cleared an ordinance which amends the RBI Act and allows it to intervene in the resolution of stressed assets. Announcing the plan, Finance Minister Arun Jaitley said the government was trying to break the “status quo” on bad loans.

The reported level of non-performing loans has surged over the past two years after the RBI conducted an asset quality review (AQR) and pushed banks to classify stressed debt appropriately. While the recognition of bad loans is now near complete, resolution has been slow. The result is that stressed assets have overtaken the net worth of listed banks, said consulting firm McKinsey and Co. in a report dated May 17.

A number of public sector banks have also seen their capital levels erode due to the surge in bad loans and need to provision against them. Some lenders like IDBI Bank have seen their credit ratings slashed as capital levels have fallen to near the regulatory minimum.

Also Read: Government Pushes IDBI Bank To Trim Costs But Is It Too Little, Too Late?

While the RBI is trying to speed up resolution, the government has stuck to its plan to provide just Rs 10,000 crore in additional capital for state owned banks. This may continue to hinder progress in resolving bad loans, said Saswata Guha, director at Fitch Ratings India.