Bankers Seek 30-Day Breather Before They Act Against Defaulters 

The Indian Banks’ Association has written to the Reserve Bank of India seeking relief from some provisions included in the regulator’s Feb.12, 2018 circular, which was scrapped after an order from the Supreme Court.

The RBI is in the midst of issuing a revised circular to help guide banks through the process of stressed asset resolution.

According to two senior bankers, who spoke on condition of anonymity, banks have requested that the process of resolution begin 30 days after a default. In its original circular, the RBI had asked banks to begin resolution even if the account is overdue by one day. The provision had been seen as impractical by bankers. However, the RBI had argued that banks must recognise and begin resolving stress as soon as it is visible.

According to the first banker quoted above, many borrowers tend to clear their default within a day or two of the due date passing. Defaults that happen due to some technical issues tend to take up a lot of time for bankers who are saddled with paperwork to cure them, the first banker quoted above said.

Countering this argument that bankers had put forth even last year, RBI Deputy Governor NS Vishwanathan had argued that lenders and borrowers must not treat a default lightly. “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,” Vishwanathan had said in a speech in April 2018.

The bankers’ association has also asked the regulator to bring back the provision of having a joint lenders’ forum structure, which the RBI had scrapped in the February 2018 circular. Lenders believe that a formal bankers’ forum for resolving a stressed account is necessary to streamline the process.

Bankers also sought that the voting requirement for a resolution plan to be cleared be brought down to 90 percent, from the current norm of 100 percent.

Earlier, bankers had expressed concerns regarding the JLF mechanism since decisions were often stalled due to smaller banks holding out. To combat this issue, the IBA and senior bankers came up with the inter-creditor agreement last year, where the lead lender was entrusted with key decision-making powers and a 66 percent vote would make a resolution plan binding on all lenders.

To be sure, suggestions by the banking industry may or may not be accepted by the RBI.

The regulator would also need to decide on the implications of an account turning overdue by more than 180 days. In its original circular, the RBI had said that all such accounts should be referred for insolvency proceedings. The Supreme Court cited certain provisions of the amended RBI Act to say the RBI’s instructions were ultra vires.