The Reserve Bank of India's requirement that banks make higher provisions for stressed assets being referred to the insolvency process is "very reasonable", said Viral Acharya, deputy governor of the RBI, on the sidelines of an event in Mumbai.
Acharya was referring to 12 companies whose loans have been identified by the RBI's independent advisory committee for resolution under the Insolvency and Bankruptcy Code, 2016 (IBC). These loans, categorised as non-performing assets, and which represent around 25 percent of the total bad loans in the sector, are to be immediately referred by lenders to the National Company Law Tribunal.
Last week, the RBI sent a letter to banks asking them to set aside a 50 percent provision against the secured portion of these loans and 100 percent of the unsecured portion.
I think the provisions are very reasonable based on the historical recovery rates that banks, even on secured debt, have typically earned in our system. I think the important thing is that you have to work on the health of the banking system and their balance sheets in parallel with the underlying resolution.Viral Acharya, Deputy Governor, RBI
The problem, Acharya added, is that banks have historically been “back-loading” provisioning against bad loans.
“If you think about the CDR (corporate debt restructuring) scheme or SDR (strategic debt restructuring) scheme, they have primarily been used to not provision for the assets rather than resolve the underlying assets,” Acharya said.
While pointing out that it is important to provide against bad loans ahead of time, Acharya hastened to add that banks have till the fourth quarter of this financial year to make higher provisions where necessary.
The central bank’s efforts to curtail bad loans comes even as it expects gross non performing assets in the banking sector to rise to 10 percent of total advances by the end of the current financial year (March 2018). In its financial stability report, released on Friday, the RBI noted that banks’ non-performing assets ratio had risen to 9.6 percent in March compared to 9.2 percent as on September 30.