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Confirming that a new list of stressed accounts has been sent to banks for resolution by the RBI, Deputy Governor Viral Acharya on Thursday said the insolvency code has changed "rules of the game" and asked lenders to use it "extensively" for resolving the stress.
"The Reserve Bank has now advised banks to resolve some of the other accounts by December 2017; if banks fail to put in place a viable resolution plan within the timelines, these cases also will be referred for resolution under the Insolvency and Bankruptcy Code (IBC)," he said here.
Acharya, who was delivering the eighth R K Talwar Memorial lecture, however, did not disclose the number of the accounts which have been referred.
Media reports over the last week have been saying the RBI has given banks a new list of 40 accounts, over and above the 12 large accounts which have been marked for resolution.
Terming the concerns on RBI directing banks to file cases under IBC, which is generally a commercial decision, as "legitimate", Acharya said this was done as per the recommendation of the Internal Advisory Committee (IAC).
"The IAC recommended that the Reserve Bank should initially focus on stressed assets which are large, material and aged, in that they have eluded a viable resolution plan despite being classified as NPAs for a significant amount of time," he said.
Welcoming progress on IBC by the banks, Acharya said they should initiate the insolvency provisions more to cleanse the system of the dud assets.
"Going forward, the Reserve Bank hopes that banks utilise the IBC extensively and file for insolvency proceedings on their own without waiting for regulatory directions," he said.
The first priority for banks should be to go for out-of-court restructuring in the pre-default stage itself, which gets triggered as soon as signs of stress become visible, he said.
"Once a default happens, the IBC allows for filing for insolvency proceedings, time-bound restructuring, and failing that, liquidation," he said.
"This would provide the sanctity that the payment 'due date' deserves and improve credit discipline all around, from bank supply as well as borrower demand standpoints, as borrowers might lose control in IBC to competing bidders," Acharya said, seeking to stress the importance of IBC.
Conceding that outcomes of the previous measures to tackle asset quality troubles have "not been too satisfactory", Acharya said the malaise will have to be fought decisively now and added that the enactment of IBC has "changed the rules of the game".
Acharya said the banks will have to set aside more money as provisions for cases referred under IBC but said the pain is necessary to improve the provision coverage ratios and protect them against losses.
"This should also help transition to higher, and more countercyclical, provisioning norms in due course," he said.
Acharya said the high proportion of NPAs -- which are skirting the double digit mark at present -- are taking a toll on the economy as the credit growth is slowing down.
"A primary cause for the recent slowdown in our growth is the stress on the banking sector's balance-sheet, especially of public sector banks," he said.
"The low efficiency of financial intermediation, have created significant headwinds for economic activity."
He said the "tepid, now almost moribund" credit growth can rebound only through quick and strong recapitalisation.