RBI plans to cap lender numbers in consortium

Move comes after small banks show reluctance to manage stressed loans

The Reserve Bank of India (RBI) is planning to restrict the numbers of members in the joint lenders’ forum (JLF) — a move aimed to break the logjam banks often face in resolving distress.

The joint lenders’ forum is a consortium of lenders formed when a loan shows incipient signs of stress. Formation of the JLF was mandated by the banking regulator last year in the wake of a secular rise in bad loans in recent years. However, large banks had a grouse that forum lenders with limited exposure were not cooperating to iron out the kinks.

“It is said that banks with meagre share neither have the incentive nor the information to independently assess a proposal. They typically go with the one with a bigger share,” RBI Deputy Governor R Gandhi told bankers at an event. (STRESS TEST)

“The suggestion is to have a regulatory limit on the number of members in a consortium, so that every member will have a serious, independent credit appraisal, and credit mindset,” he said. He added that the proposal could also have drawbacks, as it effectively restricted a bank’s freedom.

The central bank now needed to “thrash out” a proposal with stakeholders, Gandhi added. “We are yet to take a decision and will discuss with the stakeholders. The suggestion has come from various quarters,” he said.

The total stressed assets —gross non-performing assets plus standard restructured advances — in the Indian banking system had jumped to 11.1 per cent of the total advances as of end-March, compared to 9.2 per cent two years ago. This prompted the central bank to announce a new set of norms last year to identify stress at a nascent stage and take redressal measures. The formation of the JLF is a component of the new norms, which mandates lenders to form a group if interest or principal is due for more than 60 days. A loan becomes non-performing if it is due for more than 90 days. Lenders with greater exposure had expressed concern over the functioning of the JLF and had said smaller lenders often do not cooperate with large lenders to resolve an issue. A proposal in the JLF will only be passed if 60 per cent of the lenders — in terms of exposure, and 75 per cent in numbers — agree to the proposal.

In the past, RBI had admitted that a consensus in the JLF is a wrinkle. “We have received representations from bigger lenders about non-cooperation from a select few. More, smaller lenders have voiced concern about being arm-twisted by bigger lenders,” RBI Deputy Governor S S Mundra had said in May.

“Unless there is proper coordination between the interested parties, all efforts at revival are likely to fall flat,” he added.

Large lenders are pleased with the move. M G Vaidyan, deputy managing director of the country’s largest lender, State Bank of India, termed the proposal a ‘good thing’. “If there are 15-20 people in the consortium, therein lies the problem,” he said.