New RBI rules to spur debt recast, recovery

Also, feel bank heads, the changed guidelines on stressed assets will encourage the business of asset reconstruction

The Reserve Bank of India's new guidelines on revitalising distressed assets is expected to cut the time taken by lenders in preparing the schedule for recovering bad and doubtful loans.

The central bank has promised incentives for lenders to agree collectively and quickly to a resolution and bankers feel this will encourage them to reach an agreement on resolving non-performing asset (NPA) issues.

The measures should also revive business for asset reconstruction companies (ARCs), as banks can now sell standard assets having signs of stress. This will encourage the asset recast firms to revive stressed units, as opposed to only recovering the money.

"We have already created a GM (general manager) post for credit monitoring. From day two of irregularity of an account, it comes under the ambit of this GM. So, we start following up the moment we detect stress in an account. The new rules will motivate banks to find an early resolution. The dialogues with customers will start as soon as stress is detected, to work out a plan. I expect the turnaround time to shorten, following these guidelines," Shubhalakshmi Panse, chairperson and managing director (CMD) of Allahabad Bank, told Business Standard.

RBI has said there will be better regulatory treatment of stressed assets if a resolution plan is underway, while provisioning requirements will be higher if no agreement is reached. Bankers feel this will help lenders in arriving at a consensus while discussing corporate loan restructuring (CDR) packages.

"Sometimes, the CDR process takes time because of the lack of consensus. RBI's new rule will encourage banks to take a common approach in resolving these cases without delay, to take advantage of the regulatory concessions," said M Narendra, the CMD of Indian Overseas Bank.

Bankers felt the decision to make future borrowing more expensive for customers which do not cooperate with lenders in a resolution will also help reduce the turnaround time. "Customers will now be worried that if they do not cooperate, they might not get loans in future at affordable rates. This will also help improve credit discipline," said an executive director of a state-run bank in Kolkata, requesting anonymity.

RBI's measures are also expected to increase the participation of private entities in the business of asset reconstruction. The central bank has proposed steps to enable better functioning of ARCs and introduced a more liberal regulatory treatment to banks for selling their bad assets to these companies.

P Rudran, managing director and chief executive of ARCIL, the country’s largest ARC, said the focus would now be on reconstruction of companies. ARCIL will bring in operation experts to assist in reviving units which are a part of their portfolio. ARCIL is understood to be in talks with banks, insurance companies and foreign institutional investors to raise money under a fresh fund (about Rs 500 crore).

Banks has also said they will now be open to asset sales to ARCs in case the restructuring mechanism fails to take off. "We expect the number of ARCs to increase. There are many instances where ARCs have been able to recover the money successfully," said IOB’s Narendra.

Nikhil Shah, a senior director with Alvarez & Marsal, a turnaround management company, said the new framework will allow easier change of management in stressed companies. The stressed asset management space will see a rise in activity (deals) in 2014-15, he felt.