The Reserve Bank of India logo is displayed outside of the bank’s headquarters. (Photographer: Kainaz Amaria/Bloomberg)

Banks Seek Relief From RBI’s New Stressed Asset Rules

Fearing a surge in bad loans and provisions, India’s bankers are seeking relief from a tough set of stressed asset rules put out by the banking regulator in February.

In recommendations made to the Reserve Bank of India (RBI) and the Government, the Indian Banks' Association (IBA) has asked that parts of the existing debt resolution framework be retained and the definition of default be eased, said bankers familiar with the matter. Bad loans across listed banks are expected to rise to Rs 9.25-9.5 lakh crore at the end of the fourth quarter compared to Rs 8.8 lakh crore at the end of the December quarter, partly due to the new rules.

The banking industry has asked the regulator to continue with the joint lenders forum (JLF). Lenders believe the mechanism allowed them to manage stress better by providing a forum for discussing possible resolution plans.

On February 12, the RBI said that it is doing away with all previous instructions on bad loan management. This included ending JLFs and existing stressed asset resolution schemes like Strategic Debt Restructuring (SDR) and Scheme For Sustainable Structuring of Stressed Assets (S4A). The rules also said that banks must start working on a resolution plan one day after a corporate borrower has defaulted on dues.

Bankers, who spoke to BloombergQuint on conditions of anonymity, said that borrowers must be allowed a 30 day rectification period after a default. Beginning resolution within a day of default is too strict, they felt. Indeed, borrowers can often see defaults due to short term liquidity pressures, which can be corrected. If the default is not rectified within 30 days, banks can start working on a resolution plan, the bankers explained.

In their recommendations, banks have also asked the regulator to do away with the requirement that all lenders approve a resolution plan. According to the bankers quoted above, it is rare for all banks in a consortium to fully agree on a resolution plan. They have asked the RBI to allow a resolution plan to proceed if 75 percent of the bankers involved agree to it.

The latest correspondence follows previous appeals made by the IBA. Last month, BloombergQuint reported that banks have asked the RBI to allow them to continue with the standstill arrangement on classification of accounts where strategic debt restructuring (SDR) had been invoked but the restructuring had not been fully implemented. The standstill agreement allows banks to retain the same asset classification on an account as it had prior to the restructuring.

The RBI is yet to yield to these requests but has made other concessions to ease the strain on bank balancesheets.

On Wednesday, the regulator said that banks can bring down the provisioning on accounts admitted at the National Company Law Tribunal (NCLT) for insolvency proceedings. The RBI said that banks may bring down the provisioning on these accounts to 40 percent of the secured loan, from the earlier requirement of 50 percent. This benefit, however, would only be applicable for the March quarter and banks must bring the provisioning back to 50 percent of the secured loan by June 30, the regulator said in its communication to bank heads.

Separately, the RBI also allowed banks to stagger the mark-to-market losses on their bond portfolios over four quarters.

Watch this discussion with IBA’s Chief Executive Officer VG Kannan on the changes sought in RBI’s Feb. 12 circular.