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Reserve Bank of India (RBI) wants banks to be far more proactive in dealing with stress in loan accounts. It today unveiled plans outlining incentives for early detection of problem cases, timely restructuring for viable accounts and prompt recoveries and sale of unviable accounts.
It has introduced new concept called Special mention accounts mention accounts (SMAs). Banks will categorise accounts as SMA when the money remains outstanding for 30-90 days after due payment date.
It has also incorporated some non-financial signs for banks to detect and treat loan as SMA. There will not be any provisioning for SMA category loans. This is step before account gets classified as NPA.
RBI officials said the early part of calendar year 2014 will see new regime for banks and finance companies to quickly with loans much before they become non-performing assets.
Banking regulator unveiled discussion paper - Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy.
Banks will have to form lenders’ committee (Joint Lender’s Forum) early with timelines to agree to a plan for resolution. There will incentives for lenders to agree collectively and quickly to a plan – better regulatory treatment of stressed assets if a resolution plan is underway.
In case where lenders fail to reach agreement they will have to make higher provisioning than regulatory norms, RBI said.
The banking regulator will make it independent evaluation mandatory for restructuring package in loans and exposure Rs 500 crore and above. This is effort to improve in current restructuring process.
The focus will be on viable plans and a fair sharing of losses (and future possible upside) between promoters and creditors.
Borrowing would become expensive for those who do not co-operate with lenders in resolution.
There will be liberal regulatory treatment of asset sales. Also as step to encourage lenders to offload non performing loans, RBI plans to allow them to spread loss on sale over two years. They have to disclose loss fully (on sale) to enjoy this dispensation.
It has given a room for banks for takeout finance and refinancing possible over a longer period. It will not be construed as restructuring.
The leveraged buyouts will be allowed for specialised entities for acquisition of ‘stressed companies’ and there will be steps for better functioning of Asset Reconstruction Companies.
The sector-specific companies and private equity firms encouraged to play active role in stressed assets market.
With the slowdown of the Indian economy, a number of companies/projects are under stress. As a result, the Indian banking system has seen increase in NPAs and restructured accounts during the recent years.
Not only do financially distressed assets produce less than economically possible, they also deteriorate quickly in value, RBI said.
Given precarious situation, the banking system needs to recognise financial distress early, takes prompt steps to resolve it, and ensures fair recovery for lenders and investors.
