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Amid stress rising in banks’ credit portfolio, the Reserve Bank of India (RBI) on Tuesday proposed guidelines to enable lenders to identify stress at an early stage.
Banks would face increased provisioning for delayed identification of non-performing assets (NPAs), while they would also be incentivised for early detection and resolution.
In a discussion paper on early recognition of financial stress, the banking regulator proposed banks identify signs of stress before these loans turned into NPAs. It suggested such assets be classified as special-mention accounts (SMA), if repayment was overdue for a month — no additional provisioning would be required for these.
The central bank has sought feedback on its discussion paper by January 1 and expects to issue final guidelines by early 2014. Apart from asking banks to deal with stress more efficiently, RBI has also proposed a liberal framework for asset sales and to allow non-banking finance companies (NBFCs), and private equity firms to participate in the auction process.
Currently, a loan is classified as sub-standard — the first NPA category — if principal or interest payment is overdue for 91 days. Banks have to increase provisioning to 15-20 per cent for sub-standard assets, against 0.4 per cent for standard advances.
Within the SMA category, depending on the level of stress and the overdue period, three more sub-categories have been proposed. Notably, within SMA, a sub-category is to identify non-financial stress — fall in sales or operating profit below projection, return of three or more cheques within a month due to non-availability of funds or increase in frequency in overdrafts, among others.
Also, RBI will set up a central repository of information on all loans of more than Rs 5 crore value and make this available to all lenders. Banks and systemically important non-banking financial companies (with assets of more than Rs 100 crore) will have to mandatorily give such information to RBI. “Banks will have to furnish details of all current accounts of their customers with outstanding balance (debit or credit) of Rs 1 crore and above,” RBI said.
The new norms have been proposed at a time of a sharp rise in NPAs, as well as debt recast, mostly by public sector lenders, over the past couple of years. The average gross NPAs of banks were 4.2 per cent of gross advances as on September 2013, a sharp increase from 3.4 per cent a year before, according to data compiled by RBI. Public sector banks contribute 86 per cent of the total NPAs in the banking system.
Banks have been asked to form a joint lenders’ forum and decide on a corrective action plan as soon as servicing of a loan becomes overdue for 61 days. Such a forum will be mandatory for all loans of Rs 100 crore and above.
Regarding making such a forum mandatory, RBI officials said in many instances, lenders were not aware about exposure of other creditors and status of loans. There have been cases where borrowers have payed one lender against another.
The central bank has proposed such a forum, as well as action, if a loan is under stress for three quarters in a year due to non-financial reasons or remains overdue for more than 30 days (but less than 60 days) for any two quarters during a year. Higher provisioning will be prescribed by RBI if lenders conceal the actual status of the account or fail to report the SMA status to the central repository.
“The intention of this framework is not to encourage a particular resolution option — restructuring or recovery, for example — but to arrive at an early and feasible resolution to preserve the economic value of the underlying assets, as well as lenders’ loans,” RBI said.
The central bank has laid down three broad contours for corrective action plans — rectification, restructuring and recovery. Under the rectification method, banks will have to obtain specific commitment from borrowers, within a specific time period, to regularise the accounts so that those do not become NPAs.
On the second method, RBI said: “Consider the possibility of restructuring an account if it is prima facie viable and the borrower is not a wilful defaulter; that is, there is no diversion of funds, fraud or malfeasance.”
The recovery process has been advised only after the first two steps fail to yield results.
The discussion paper also proposed steps likely to boost stressed asset sales to asset reconstruction companies. Not only are NBFCs allowed to sell their bad loans but these entities, along with private equity firms, are now also allowed to participate in the NPA auction process and will be provided authority under the stringent Sarfaesi Act.
RBI officials said the main objective is that creditors should recover their dues. "It is very much relevant for public sector banks, which bear a much higher burden of NPAs and restructured loans. We also want to give a reasonable deal for promoters hit by circumstances," an official said.
EASING THE STRESS
RBI’s proposals
- Lenders’ panel: Early formation of a lenders’ panel with deadline for resolution of the issue
- Incentives: For lenders agreeing collectively and quickly to a plan
- Provisioning: To be accelerated if no agreement can be reached
- Future trouble: Expensive future borrowings for those not cooperating with lenders in resolution
- NPA sale: Lender can spread loss on sale over two years
- Parties: Sector-specific companies/private equity firms encouraged to play active role in stressed asset market
