Govt asks PSBs to look for alternative resolution mechanism outside IBC

The Union government has directed public sector banks (PSBs) to look for an alternative resolution mechanism outside the Insolvency and Bankruptcy Code (IBC). The government has further told them to build “resilient credit risk control systems” for high-value loans, and has set a deadline of 45 days to decide upon consortium lending proposals.

These measures are part of a second round of reforms under the Enhanced Access and Service Excellence programme, known as EASE 2.0, sent by the finance ministry to all PSBs. PSBs will be bound to follow EASE 2.0 because the 64-point measures will be part of the annual performance appraisal of bank executives of the deputy general manager and above level. 

Banks have also been asked to promote the disbursement of Mudra loans, which will be taken into account in the performance review of high-level executives. 
 

The government has asked banks to enhance the cash recovery rate in non-performing asset (NPA) accounts outside the IBC process and told them to secure the recovery of at least 10 per cent of NPAs within 12 months in non-IBC cases and within 18 months in IBC cases “in a high proportion of NPA accounts”. 

As part of EASE 2.0, banks should be “exploring alternative avenues of NPA resolution in a time-bound manner and thereafter initiate the Corporate Insolvency Resolution Process (CIRP)”. The government is looking at revising the threshold for accounts to be taken to the insolvency court by lenders, from Rs 1 lakh at present.

On Monday, following a review meeting with PSBs, Corporate Affairs Secretary Injeti Srinivas flagged a high number of cases going through the IBC as a cause of concern and said the government would like banks to go to the insolvency court as a last resort.

Corporate loans of over Rs 50 crore and micro, small and medium enterprises (MSME) loans above Rs 10 crore will need to be highly scrutinised by PSBs, which will set up a “comprehensive data-driven, codified and audited scorecard and categorisation of risk” for such accounts. The new risk framework will closely look at business accounts where at least 26 per cent stake is held by related parties of the promoter. 

Top six PSBs, in terms of business, including State Bank of India, Bank of Baroda and Punjab National Bank, have been told to deploy dedicated, industry-specific risk-scoring teams to cover at least 60 per cent of the corporate and MSME loan books.

Reform agenda
 

Some of the measures spelt out by the finance ministry to PSBs as part of EASE 2.0 reforms:

Financial inclusion

Set up central processing centres for rural loans

Scale up coverage of microinsurance among banking customers 

Credit off-take

Dedicated sales channels for personal loan outreach

Governance and HR

Include EASE reforms in annual performance review of GM/DGM-level executives and above

Responsible banking

Institute comprehensive, datasets-driven scoring and categorisation of risk for high-value corporate and MSME loans

Implement IT-based early-warning signal system