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Amid stress rising in banks’ credit portfolio, the Reserve Bank of India (RBI) on Tuesday proposed guidelines that will enable lenders to identify stress at an early stage. According to these norms, banks would face increased provisioning for delayed identification of non-performing assets (NPAs), while they would 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, even before these loans turned into NPAs. It suggested that 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 1 January 2014 and expects to issue final guidelines early 2014 . Apart from asking banks to deal with stress more efficiently, RBI has also proposed liberal framework for assets sales and has allowed non-banking finance companies, and private equity firms to participate in the auction process.
According to the current norms, 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 created to identify non-financial stress -- like fall in sales or operating profit below projection, return of three or more cheques within a month due to non-availibility of funds, increase in frequency in over drafts, among others.
Also, RBI will set up a central repository that will have information on all loans of more than Rs 5 crore value and will make that 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 are released at a time when sharp rise in non-performing assets as well as debt recast, mostly by public sector lenders over the last couple of years. Average gross NPA of banks were 4.2 per cent of the gross advances, as on September 2013, a sharp increase from 3.4 per cent a year ago, according to data compiled by RBI. Public sector banks contribute 86 per cent of the total NPA of 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 ~100 crore and above.
Regarding making Joint Lender’s Forum mandatory, RBI officials said in many instances lenders were not aware about exposure of other creditors and status of loans and there have been cases where borrowers have played 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 an 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 result.
The discussion paper also proposed steps likely to boost stressed asset sale 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 Sarfesi Act.
RBI officials said that the main objective is that creditors should to recover dues. "It is very much relevant for public sector banks which bear much higher burden of NPAs and restructured loans. We also want to give reasonable deal for promoters who are hit by circumstances," a official said.
