Protecting the insolvency process

Regulatory forbearance should be viewed with caution

In February, the Reserve Bank of India (RBI), which serves as the banking regulator and is thus overseeing the bank asset clean-up process, had announced stringent norms for banks to follow regarding the treatment of bad loans. In the current system, a single day’s delay in repayment will require the bank to recognise the borrower as having defaulted. This served an important purpose. For too long, banks had chosen to ignore bad loans, and had sought other methods, such as “restructuring” schemes, in order to avoid taking action or making proper provisions. Many banks have clearly misused the earlier rules