RBI turns down banks' plea to relax June 7 circular on stressed assets

Loans of over Rs 1.8 trillion, for which agreement has been signed by banks, are likely to be referred to IBC

With no resolution in sight for nearly Rs 3 trillion of stressed assets, banks seem to be reaching a dead end with respect to the inter-creditor agreements (ICAs) signed for these loans. 

Sources said banks had sought some relaxation from the Reserve Bank of India (RBI) on timelines and modalities for reaching a resolution under the regulator’s June 7 circular on prudential framework for resolution on stressed assets. However, highly placed sources said the regulator was unwilling to budge on its stand. 

“As banks aren’t making much progress on ICAs signed under the June 7 circular, there was another representation made to the RBI asking for an extension in timelines and allowing all categories of lenders, including mutual funds and pension funds, to form part of the ICA. 

But, the RBI has made it clear that the circular will be upheld in its original form,” said a top official of large bank.

Timeline for implementing the resolution plan under the June 7 circular would lapse, on a case-to-case basis, from early January 2020. It is estimated that loans worth Rs 1.8–2 trillion, or nearly two-thirds of the Rs 3-trillion stressed assets under the purview of ICAs, may be referred for resolution under the IBC. 

Bankers say the provisioning burden would be huge if the resolution plans aren’t implemented within time. To mitigate the immediate provisioning burden, banks are looking at resolving these loans under the Insolvency and Bankruptcy Code (IBC). 

According to the June 7 circular, banks have to make an additional provisioning of 20 per cent if the resolution plan isn’t implemented and within a year another 15 per cent, taking the burden of additional provisioning burden to 35 per cent. The circular, however, allows for reversal of this provisioning, if resolution is pursued under the IBC. 

“Banks will, therefore, prefer to opt for resolution outside the June 7 circular, though ICAs may not be terminated ahead of its deadline,” said a person working closely on resolving stressed loans. 

This implies that while banks may have to make an additional provisioning in the March quarter of this fiscal year, the provisioning could be subsequently reversed either in the same quarter and/or in the June quarter of the next fiscal year, as and when IBC proceedings are invoked and the case admitted in the courts. 

Bankers, however, believe that the June 7 circular isn’t a total failure with respect to resolution, as certain loans to the power sector may find success. “For companies, which have long-standing power purchase and fuel supply agreements, banks are willing to restructure these loans. Problem is with the companies with weak balance sheets and those who have suffered impairment losses in the recent quarters,” said a senior executive of a private bank. 

“Their ability to function as a going concern has come under threat. No amount of handholding can help them and these cases have to be referred to the IBC,” the executive said.