Provisioning under IBC not unusually high: RBI Deputy Governor

RBI has directed banks to set aside 50% cover in the form of provisions for the cases referred for insolvency proceedings

Provisioning under the Insolvency and Bankruptcy Code (IBC) was not unusually high and would improve long-term credit quality of banks, 

N S Vishwanathan, deputy governor, Reserve Bank of India (RBI), said in Kolkata on Friday.

The RBI has directed banks to set aside 50 per cent cover in the form of provisions for cases referred to the National Company Law Tribunal (NCLT) for insolvency proceedings.

“A strong insolvency code would improve the long-term credit quality of banks, and will place banks on a firm footing. Also, the provision only meant expected loss, and banks would write back in case of recovery,” said Vishwanathan, while delivering a speech at the Merchant’s Chamber of Calcutta. 

“The S4A envisaged the minimum sustainable debt to be 50 per cent. It is, therefore, only logical that provisions made for cases referred in the IBC be at least 50 per cent.”

Calling the issue of stressed assets as a “serious concern” in the banking sector, Vishwanathan said sub-optimal restructuring would only attenuate the problems faced by banks.

On the issue of linking bank lending rates to a market benchmark for better monetary rate transmission, Vishwanathan said this would enable transparency in the system. 

“There are certain problems with marginal cost of funds based lending rate, therefore, the need for having an external benchmark for deciding interest rates,” he said. “The days of regulating interest rates are over…. Interest rate would not be linked to any bank-specific issue, and the final rate will be a function of competition.”

Recently, a panel headed by Janak Raj, principal advisor to the monetary policy department, had recommended all floating rate loans advanced from April could be linked to external benchmarks.  

The RBI deputy governor also hinted the regulator was working on a policy to regulate cryptocurrency, or virtual money used as medium of exchange. “I can’t comment on a policy which is still in the making,” he said, responding to a query on the views of the RBI on bitcoins.
 

(From left) N S Vishwanathan, Deputy Governor, RBI, Hemant Bangur, president, Merchants' Chamber of Commerce and Pawan Bajaj, MD & CEO, UBI, at an interactive meeting in Kolkata. BS Photo by Subrata Majumder