RBI's June 7 circular raises NPA woes for merging public sector banks

Fear delay in execution of resolution plans during transition will lead to fresh provisioning

The Reserve Bank of India’s (RBI’s) June 7 circular is turning out to be a concern for state-run banks whose mergers have been announced, given the strict deadlines for the implementation of resolution plans.

This is because a failure to go ahead with the resolution plans within the prescribed period set by the central bank will trigger a cumulative additional provisioning of 35 per cent.

The revised circular on stressed assets (which replaced the earlier February 12, 2018, circular after it was declared ultra vires by the Supreme Court) calls on banks to make additional provisioning in such cases as follows — 20 per cent on the outstanding amount six months after the review period; another 15 per cent a year later.

The worry is that the proposed mergers of four sets of state-run banks have the potential to slow down decision-making. A host of issues like exposure to firms within a consortium have to be sorted out, even as post-merger banks will have to deal with them as a single entity. The magnitude of the proposed mergers is huge, as these banks will collectively have a market share of 24.1 per cent. No country in the world has seen such a rearranging of banking market shares at one go.

Senior bankers are coming around to the view that they may have to approach the Ministry of Finance and the central bank on the additional provisioning aspect of the June 7 circular and seek relaxation on the same.

A fresh layer of complexity is that the RBI is yet to state the date the June 7 circular will apply for exposures lesser than Rs 1,500 crore. As on date, it has only said this will cover exposures over Rs 2,000 crore (from June 7, 2019); for those between Rs 1,500 crore and Rs 2,000 crore from January 1, 2020.

“The management bandwidth (of the merging banks) is already stretched. We also have to push loans to revive demand during the festive season with an outreach programme,” said another banker.

In August, New Delhi decided to merge four sets of state-run banks — Punjab National Bank, Oriental Bank of Commerce, and United Bank of India; Canara Bank and Syndicate Bank; Union Bank of India, Andhra Bank, and Corporation Bank; and Indian Bank with Allahabad Bank. The mergers are to come into effect from April 1, 2020.

Many of the merging banks in their individual avatars have been members of the same consortium in several cases and it’s not clear at this point in time what stand they took on matters of credit. They now have to take a view as individual banks in the run-up to the formalisation of the mergers, even as they think of themselves as virtual post-merged entities. The human resource aspect is another factor. “Nobody wants to take a decision as some of the senior officers don’t want to spoil their record,” said a banker.

Delayed decision-making and an as-yet unsettled Insolvency and Bankruptcy Code (2016) architecture have seen resolutions emerging in only four of the dozen largest cases of defaulters against whom bankruptcy proceedings had started with the central bank’s nudging.