Banks, bankers may face fines for poor progress over RBI's June 7 circular

The fresh set of guidelines, which will usher in a stricter compliance regime, is in the works and could be in the public domain by end of March

The Reserve Bank of India (RBI) may impose heavy penalties on banks, and stipulate higher provisioning for stressed loans following a supervisory review of its June 7 circular. And, in a first-of-its-kind move, chief executive officers (CEOs) and senior management of banks could also be held liable for lack of progress.

The RBI has also indicated that banks can start resolution of stressed loans less than Rs 1,500 crore without waiting for a formal notification. The June 7, 2019, circular was only applicable for stressed accounts in excess Rs 2,000 crore. From January, it was also applicable for stressed accounts ranging between Rs 1,500 crore and Rs 2,000 crore.

The fresh set of guidelines, which will usher in a stricter compliance regime, is in the works and could be in the public domain by the end of March. “The less-than-satisfactory progress under the June 7 circular has been under scrutiny. And then you have divergences and frauds recognition. All this is being looked into,” said a source.

The penalties and provisioning will be over and above the additional provisioning banks have to make under the June 7 circular — 20 per cent after 180 days from the end of the review period; and 15 per cent after a year; or a total additional provisioning of 35 per cent.

The central bank is, in particular, concerned about the huge increase in frauds; and whether a cover-up may be the reason for the lack of movement under the June 7 circular, as also the collapse of inter-creditor agreements (ICA). “We have to see whether this lack of progress is merely a case of banks not being able to come to a decision on stressed assets, or if there is something deeper,” the source said.  

The RBI’s move to impose penalties and higher provisioning is the follow-on impact of the June 7 circular though it had not mentioned this will form part of a new compliance regime following a review. The RBI had stated “any action by lenders with intent to conceal the actual status of accounts or evergreen the stressed accounts will be subjected to stringent supervisory and enforcement actions, including, but not limited to, higher provisioning and penalties.”  A footnote on penalties, added: “This may be in addition to direction to banks to file insolvency application under the Insolvency and Bankruptcy Code.” 

The RBI’s internal review of 13 banks’ stressed assets initially assigned under its June 7 circular — of Rs 2,000 crore and above — notes that an ICA is yet to be signed for exposures amounting to Rs 33,610 crore while the same has been signed with respect to aggregate exposures of Rs 6,075 crore. And resolution plans (RP) have been implemented only with respect to one borrower with a reported exposure of Rs 1,617 crore.

The move to draw in the senior management as part of a stricter compliance regime follows from the RBI’s stance that lenders must put in place board-approved policies for resolution of stressed assets, including the timelines for resolution. Since default with any lender is a lagging indicator of financial stress faced by the borrower, it is expected that the lenders initiate the process of implementing a RP even before a default.