RBI Makes A Smart First Move On Bad Loan Resolution
Tourists play a game of giant chess on the pier in Southend-on-sea, U.K. (Photographer: Chris Ratcliffe/Bloomberg) 

RBI Makes A Smart First Move On Bad Loan Resolution


Just about a month after the Reserve Bank of India got powers to intervene directly in bad loan resolution, the regulator made its first move silencing sceptics (including this publication), who felt that the new framework will be more of the same.

In a Tuesday evening announcement, the RBI said that the Independent Advisory Committee set up for the purpose had met on Monday. The exact composition of the Committee is still not known but we will come to that point later.

At its very first meeting, the committee decided to refer twelve large bad loan accounts for resolution under the Insolvency and Bankruptcy Code. These are accounts that have more than Rs 5,000 crore in fund and non-fund exposure and where more than 60 percent of the account was non-performing as of March 2016. The twelve accounts based on this criteria account for 25 percent of the current gross non-performing assets (NPAs) in the system, said the RBI.

RBI Makes A Smart First Move On Bad Loan Resolution

The country's listed banks had gross NPAs of Rs 7.7 lakh crore as of March 31, 2017 shows data collated by BloombergQuint. This means that means roughly Rs 1.9 lakh crore in loans have been referred to the IBC.

In doing so, the RBI has played a quick, smart and safe move. Here's why.

The first message that comes through via this action is that authorities (the government and the RBI) are now serious about ending the status quo on bad loans. While recognition of bad loans moved quickly, resolution has been delayed for a number of reasons. Prime among them has been the unwillingness among bankers to take decisions on steep haircuts and the inability of banks to provide for these steep haircuts.

By listing the first twelve accounts that will be undergo bankruptcy proceedings, the RBI has taken the first decision on behalf of the banks and laid down a firm timeline (180-270 days as provided by the IBC) within which the next leg of decisions will be taken.

The final call on whether a resolution plan is approved or liquidation proceedings are initiated lies with the courts. As such, the RBI will keep an arm’s length from the messy nitty gritty of restructuring or liquidating these accounts.

The criteria used for selecting the twelve accounts also ensures that the RBI is not criticised for being hasty. The regulator has said that these are accounts which were NPAs as of March 2016. Essentially this means that these accounts have been classified as bad loans for over a year and banks and promoters have had adequate time to come up with a resolution plan. Since they have failed, the regulator is now laying down a process bound by time and law for the resolution. The catch here remains the untested waters of the IBC. Bankers remain skeptical about whether the newly instituted mechanism can handle large accounts in such volumes. But we will never know if we don’t try.

Finally, in terms of provisioning the RBI has held out some hope that provisioning requirements for cases being resolved under the IBC may be lighter. "The circular on revised provisioning norms for cases accepted for resolution under the IBC is being issued separately," said the central bank. In any case, since these are accounts that have been classified as NPAs for more than a year, banks would have provisioned between 25-40 percent against these accounts, based on the existing rules.

This brings us to the final question on who is actually making these decisions. The RBI, both in its previous circular and this one, has said that the Independent Advisory Committee comprised "majorly of its independent Board Members." This does not preclude the regulator from having its own senior staff on the committee.

Even if the governor and the deputy governors are not directly on the committee, the speed with which this first decision has been taken suggests that the regulator is in the driving seat of the bad loan resolution process now. That's not to say that it will be easy. The trickier part of the process will be deciding what to do with accounts that are not clear NPAs. For those, the RBI has given banks another six months within which to come up with a solution. If they don't, those accounts too may head to the bankruptcy court.

Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.

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