Over to banks now

New NPA resolution norms are finely balanced

The Reserve Bank of India (RBI) has adopted a carrot-and-stick approach to the resolution of stressed assets. The new norms released last Friday have empowered banks to hammer out a resolution but have also put in place enough safeguards against any intent to evergreen stressed accounts. Lenders will be subject to stringent action, including higher provisioning and monetary penalties. Resolution plans shall provide for payment not less than the liquidation value due to dissenting lenders, the RBI said in its latest framework.

The most substantive change in the new stressed asset resolution norms two months after the Supreme Court struck down Mint Road’s February 12 circular is that banks now get a 30-day window to decide if an account is a non-performing asset (NPA) as distinct from the earlier one-day default norm, which was both harsh and impractical. The revised circular gives non-banking financial companies (NBFCs), small finance banks, Nabard, Exim Bank and Sidbi a place around the resolution table.

The idea is obviously to make sure that most cases should be settled within the new framework, with the Insolvency and Bankruptcy Code (IBC) being the last option. While lenders have to be proactive, the RBI will continue to direct banks to start insolvency proceedings for specific defaults. If anything, pressure has been increased on the banks, which have to mandatorily sign an inter-creditor agreement (ICA). The ICA will provide any decision agreed by lenders representing 75 per cent in terms of voting share or 60 per cent of them in terms of numbers. Banks will have to work double-quick around their internal bureaucracies to ink an ICA within a month of default.

Failure to see the resolution plan (RP) through will entail an additional 35 per cent in provisioning — 20 per cent if they can’t make it work within 180 days and an additional 15 per cent if no resolution is found within a year. The price to be paid by way of additional provisioning will be of worry for state-run banks, which have been recently capitalised and also the ones which continue to be under the RBI’s Prompt Corrective Action framework. But it is unlikely the more prudent banks will be unduly bothered on enhanced provisioning as they would have already done so for the entire exposure on their own.

While the central bank’s norms will apply to defaulters of Rs 2,000 crore immediately, the same for those between Rs 1,500 crore and less than Rs 2,000 crore will kick in only from January 1, 2020. Such a staggered approach has raised a few concerns among banks — visibility is poor as to how they are to proceed from here on in the cases of exposures of less than Rs 2,000 crore. Smaller banks in particular are worried on this aspect.

The thinking behind the revised circular is that the recognition of default or accounting for deterioration in the quality of assets should be independent of the reasons for such default or deterioration. The best part of the new norms is that they retain the spirit of the February 12 circular and offer a mechanism that will enable resolutions through requisite majority. The onus now is on banks to speed up resolution as the earlier circular impacted loans worth Rs 3.8 lakh crore across 70 large borrowers.