New NPA norms: RBI offers some breather

The Reserve Bank of India (RBI) has offered some leeway to banks for early detection and resolution of bad loans. Under the new regime kicking off from April 1, lenders can finance 50 per cent of the outstanding loan value, RBI said in Framework for Revitalising Distressed Assets in the Economy, released on Thursday. Earlier, RBI had proposed to allow takeover of existing loans by new financiers at 60 per cent or more of the loan value.

The central bank also diluted rules for accelerated provisioning it had proposed for non-performing accounts. Now lenders will make 25 per cent provision for unsecured loans that remain unpaid for six months. Initially, RBI had proposed 30 per cent provisions.

Plus, for loans that have remained unpaid for two years, banks have to set aside 40 per cent, instead of 50 per cent.

The new framework calls for early formation of a lenders' committee with the timeline to agree to a plan for resolution. It also offers incentives for lenders to agree collectively and quickly to a restructuring plan. It will give better regulatory treatment of stressed assets if a resolution plan is underway. However, it will attract accelerated provisioning if no agreement can be reached. Seeking improvements in the current debt restructuring process, the framework allows independent evaluation of large value restructuring. This is for purpose of framing viable plans and a fair sharing of losses (and future possible upsides) between promoters and creditors. It also mooted steps to enable better functioning of asset reconstruction companies. This is apart from encouraging sector-specific companies and private equity firms to play active role in stressed assets market. It has offered liberal regulatory treatment provided for asset sales. Lenders can spread loss on sale over two years, provided the loss is fully disclosed. Leveraged buyouts will be allowed for specialised entities for acquisition of 'stressed companies'.

Steps to enable better functioning of asset reconstruction companies mooted.

The sector-specific companies / private equity firms will be encouraged to play an active role in stressed assets market, RBI said.

The continuing slowdown in the economy has led to a historic pile of bad loans in the system.

RBI in its Financial Stability Report on December 30 had warned the strain on asset quality continues to be a major concern. "In a base case scenario, with the present conditions continuing, the gross NPAs (non-performing assets) in the system will rise to 4.6 per cent by September 2014 from 4.2 per cent in September 2013 or to about Rs 2.29 trillion from Rs 1.67 trillion a year earlier," it had noted.

Key drivers under new regime

* Early formation of Joint Lender's Forum for action plan

* Carrot for lenders to agree collectively and quickly to a plan

* Penalty of higher provisioning for delayed actions

* Independent evaluation for large recast deals

* Take-out and refinancing will not be treated as restructuring

* Losses from selling of NPAs can be spread over two years

* Buying and selling of NPAs between asset recast firms