New Prudential Framework Provides Leeway To Lenders And Encourages Them To Refer Cases To Insolvency and Bankruptcy Court

The new prudential framework provides some leeway to lenders and encourages them to refer cases to Insolvency and Bankruptcy Court (IBC), according to the State Bank Of India's latest research update Econwrap. This would entail write back of additional provisions. Under the current and revised dispensation, an additional provisioning of 20% would have to be made in case resolution plan is not implemented within 180 days from the end of the review period, which is after 210 days of default. This would allow some breathing space to lenders in provisioning and succumbing to distress resolution. In case the default period exceeds 365 days, an additional provisioning of 15% (i.e. total additional provisioning of 35%) would have to be made. A better time frame and transition offered in the revised framework on this would allow the lenders the headroom and flexibility for resolution in large ticket cases. Also, noteworthy is the consensus among lenders in terms of value and also in terms of number.

Earlier, there was 100% consensus required, but with new framework in place 75% lenders by value and 60% by numbers would be required for resolution. Further, lenders are to enter into inter-credit agreement. The provision relating to resolution implementation within 180 days from March 1, 2018 (reference day / default day), no longer exists for large accounts with aggregate exposure of more than Rs 2000 cr. Instead, slab-wise reference dates have been set as per table provided herein. For exposures of less than Rs.15 bn, the reference date is yet to be announced. All the above measures are likely to facilitate better realisation and write back of provisions. Going forward, the asset quality is also seen improving. Overall, various efforts made by RBI in strengthening its regulatory and supervisory framework and the resolution mechanism initiated through IBC are bearing fruit, as also can be seen from the GNPA trend since Sept'18.

As per the Report on Trend and Progress of Banking in India 2017-18, the SCBs had GNPA's of more than Rs 10 trillion. With the combined efforts of RBI and Banks, Asset quality showed improvement with SCBs' gross non-performing assets (GNPA) ratio declining from 11.5% in March 2018 to 10.8% in September 2018 and 9.3% in March 2019. In a sign of possible recovery from the impaired asset load, the GNPA ratio of both public and private sector banks showed a half-yearly decline, for the first time since March 2015, the financial year-end prior to the launch of Asset Quality Review (AQR).

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