New stressed asset norms will aid resolution prospects, say bankers

The revised framework for the resolution of stressed assets will help lenders to prepare workable plans for companies and enhance prospects of recovery, bankers said.

Rajkiran Rai G, managing director and chief executive, Union Bank of India, said the incorporation of the Inter-Creditor Agreement (ICA) in rules would help align many lenders in resolution activity. 

The revised framework has rules for seeking approval from lenders (75 per cent by value and 60 per cent by number) for resolution plans. This is a realistic provision, he added. The February 12 circular sought 100 per cent agreement among lenders on a resolution plan.

V G Kannan, chief executive, Indian Banks’ Association (IBA), said there were incentives for staying the course to implement resolution plans in 180 days and disincentives for breaching timelines.

Also, the RBI has relaxed the threshold condition for upgrading an account under a resolution plan. Now, lenders can decide on upgrading if 10 per cent of outstanding principal debt is paid during the resolution period. In the earlier circular, the RBI had kept threshold of 20 per cent for repayment, Kannan said.

A senior State Bank of India executive said the 10 per cent threshold was a realistic level because many units under resolution were working at low operating levels. The 10 per cent level will increase prospects of an effective rollout of resolution plans and recoveries. 

Sapan Gupta, National Practice head, banking and finance, Shardul Amarchand Mangaldas, said the RBI circular was a mixed bag. On the positive side, provisioning will be frozen when the resolution plan under the Insolvency and Bankruptcy Code (IBC) is pending with the National Company Law Tribunal, hence banks won’t be penalised for court delays. It will also give a boost to the interim finance market as that would be treated as a standard asset.

Pointing to likely challenges, he said the provisions on signing inter creditors agreement within 30 days of default would be difficult. 

Also, additional provisioning is not a strong deterrent for delayed implementation. So the resolutions may get delayed. 

Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services, said delay in resolutions would be major challenge for public sector banks. Delay could mean a low level of recoveries, leading to higher capital requirements, which the government as their owner may have to make good.