A man drinks tea as he walks past the Reserve Bank of India (RBI) headquarter building in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

RBI’s ‘One-Day Default’ Rule Causing Short-Term Disruptions, Say Bankers

The Reserve Bank of India’s diktat to banks that even a one-day delay in payment of dues must be reported and acted upon is causing confusion with even some blue-chip firms falling in this bucket, three bankers, who spoke on conditions of anonymity, told BloombergQuint.

The new rule is resulting in a high number of ‘default accounts’ being reported to the Central Repository for Information on Large Credit (CRILC), these bankers said. In many cases, the dues are repaid soon after but revoking the intimation to the database is difficult to do, they said.

The Financial Express on Thursday reported that more than 4,000 corporate borrowers, with nearly Rs 1.2 lakh crore worth loans, had been classified under the one day default norm since it was introduced in February. The data was obtained through a query under the Right to Information Act.

Another data point which possibly reflects the impact of this new rule is the jump in accounts classified in the first bucket of special mention accounts (SMA-0). An account is classified under SMA-0 if the repayment is delayed up to 30 days from the due date.

The number of accounts in this category jumped by 277 percent in the year ended March 2018, showed the RBI’s Financial Stability Report released earlier this week.

In its revised stressed asset framework released in February, the RBI told banks that they must inform CRILC on a weekly basis about accounts where repayment has been delayed even by a day. This reporting is mandatory for accounts where outstanding loans are more than Rs 5 crore.

For cases where the banking sector exposure goes beyond Rs 2,000 crore, banks are also expected to initiate rectification or restructuring procedures immediately, to ensure that the amount due is repaid. Banks have 180 days to complete this restructuring before they refer the account for insolvency proceedings.

Bankers say the new rules are leading to reputational risk and creating impediments in future borrowings.

Earlier, the only asset classification that mattered was that of non-performing asset (NPA). Accounts overdue by 90 days are classified as NPAs. Bankers would typically start following up on overdue payments only close to the 90-day mark so as to prevent an account being tagged as NPA.

However, with the new norms, bankers are being forced to follow up on accounts even if dues are delayed by a day for legitimate reasons, said the first banker quoted above, the head of corporate lending at a large private bank. Often large companies fall behind the payment due date because of delays in international and even government payments. It would thus be unfair to initiate any action against them, the banker said.

A large number of borrowers who might be part of the one day default list are repaying their loans within the first two weeks, the bankers quoted above said. Accounts which have outstanding dues of more than Rs 2,000 crore, in particular, are mindful of ensuring that dues are repaid quickly to avoid a scenario where banks initiate restructuring plans.

Not all companies that are in the one-day default category are cases where the problem is technical in nature. For some accounts, the delayed payments reflect a build-up of stress. Such companies could move towards insolvency.

For accounts which had missed repayment in the first cycle of reporting in February 2018, the 180 day period ends in August. This means that by September, some of these accounts may be sent for insolvency proceedings. Large power sector assets, which are yet to be resolved, may be part of this list, said that MD & CEO of a large public sector bank.

Banks have appealed to the regulator to water down the ‘one-day default’ norm. According to the first banker quoted above, it would be prudent to exempt working capital facilities and enforce the rule only for term loans. For now, the RBI has made an exception only for cash credit by allowing a 30-day grace period. Apart from cash credit, overdrafts, demand loans, bill discounting are facilities broadly clubbed as working capital.

The RBI has not relented and defended its new framework.

In a speech in April, RBI Deputy Governor NS Vishwanathan had said that there was a need to improve the discipline among borrowers and bankers.

One has to note that ‘default’ in payment is a lagging, not leading, indicator of financial stress of a borrower and the framework provides 180 days after a default to put in place a resolution plan. Lenders need to be proactive in monitoring their borrowers and be able to identify financial stress using a combination of leading indicators and renegotiation points in the form of loan covenants rather than wait for a borrower to default.
NS Vishwanathan, Deputy Governor, RBI

The February 12 circular, while welcome in the long run, has led to an increase in bad loans in short term.

At the end of the March 2018 quarter, the gross NPAs of listed banks exceeded Rs 10 lakh crore, because the RBI discontinued all existing restructuring schemes. Hence, accounts where these restructuring schemes had been invoked but not implemented, were classified as NPAs.