A State Bank of India Ltd. (SBI) building stands illuminated at night in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

NPAs Will Not Increase Under RBI’s New Rules, Lenders’ Body Says

The Reserve Bank of India’s new stressed asset resolution framework will not lead to a jump in the reported level of non performing assets (NPAs). That’s the view coming from the Indian Banks’ Association, in contrast to several brokerage houses who said that NPAs will rise following the implementation of the new regulations.

On Monday, the RBI released a revised stressed asset framework to ensure speedy resolution of bad loans in the future. Key features of the new framework include doing away with various debt restructuring schemes, among others. To replace these schemes, the RBI has put in place a strict 180-day timeline over which a resolution plan must be implemented, failing which stressed accounts must be referred to the Insolvency and Bankruptcy Code.

Speaking to BloombergQuint, IBA Chief Executive Officer VG Kannan said that stressed assets will not rise as banks have already been trying to ensure that recognition of bad loans happens quickly. In addition, Kannan feels that a lot of flexibility has been given under the new norms for banks to come up with a resolution plan within 180 days.

Brokerages and rating houses such as Fitch Ratings and BOB Capital Markets have said that they would expect NPAs to rise as the RBI has forced lenders to recognise and resolve stressed assets fairly quickly. In a note issued on Wednesday, Credit Suisse said that it expects a larger amount of bad debt to be referred for resolution to the IBC, which in turn would mean higher provisions. Credit Suisse estimates that close to Rs 5 lakh crore in debt may fall under the IBC over the next few months.

The stressed asset level would not increase. But a bigger effort will be made to come up with a resolution plan. I feel that instead of having a straight-jacketed approach, which some of the existing schemes provided, this resolution framework gives lenders and promoters freedom to come up with any resolution plan. Therefore, in a way this is also a relaxation.
VG Kannan, CEO, IBA

Also Read: BQExplains: What RBI’s New Bad Loan Resolution Framework Means

Kannan, however, believes that it will be challenging to get all banks to agree to a resolution plan, particularly in cases where multiple lenders are involved. Under the previous framework, the RBI had allowed for resolution plans to get approved with 60 percent lenders on board.

“Inter-bank discipline should prevail for them to come to a decision immediately.” However, under the new circumstances the borrower, too, may be keen to rally around the bankers for a proper resolution, he added.