Government, RBI Lock Horns Over New Stressed Asset Rules

The finance ministry fears that the new stressed asset rules may have unintended consequences

Finance Minister Arun Jaitley with Reserve Bank of India Governor Urjit Patel in New Delhi on February 11, 2017. (Photograph: PIB)
Finance Minister Arun Jaitley with Reserve Bank of India Governor Urjit Patel in New Delhi on February 11, 2017. (Photograph: PIB)

India’s finance ministry is not in favour of the new stressed asset rules announced by the Reserve Bank of India in February, as it fears the tough new norms will have unintended consequences, an official told BloombergQuint on the condition of anonymity.

The government’s position is similar to the line taken by bankers, who are arguing for a dilution in some of the key provisions of the norms released on Feb. 12. As part of the circular, the RBI withdrew all existing stressed asset schemes and the joint lenders forum mechanism. Banks were told that they must start working on a resolution plan even if an account is overdue by a day. Failure to come up with a resolution plan in 180 days would lead to the account being referred for insolvency proceedings.

It is these two key provisions that the government is opposed to.

The government is of the view that initiating resolution of stressed cases within a day of default would deter bankers from providing further funding to these accounts, the official quoted above said. While there is no bar in funding stressed accounts, banks tend to get risk averse and, in the case of public sector banks, fear questions from vigilance agencies. The person quoted above said that banks’ reluctance to fund such an account would only lead to a quicker deterioration of the account.

Bankers have raised similar concerns and suggested that a one month ‘corrective period’ be given before banks start discussions on a resolution plan. They have also asked that the joint lenders forum be continued as it gives a platform for discussion. The government shares this view, the person quoted above said.

The official quoted above also felt the 180-day period given for resolution is too short. The result, this person said, could be a bunching up of a large number of cases at the National Company Law Tribunals.

Some of these concerns have been raised in a note circulated by Principal Economic Adviser Sanjeev Sanyal, said the person quoted above. When contacted, Sanyal declined to confirm or deny.

An email sent to a spokesperson of the finance ministry seeking comment went unanswered.

Another official aware of the development, said the new norms could lead to a significant jump in stressed assets at a time when banks are already saddled with large bad loans. Gross non performing assets of listed banks are expected to rise to Rs 9.25-9.5 lakh crore at the end of the March quarter from Rs 8.8 lakh crore at the end of the December quarter.

The differences between the government and RBI are being negotiated, said the second person quoted above.

The NCLT infrastructure will have to strengthened to handle the large volume of cases that might be referred to it, said Kartik Srinivasan, senior vice president at ratings agency ICRA. Srinivasan added that the new norms by RBI should help in improving credit discipline with borrowers, but, at the same time, will impact credit growth as bankers would shift their focus to resolution.

Earlier this week, bankers told a parliamentary panel that the regulator’s new stressed asset rules are too stringent. Bankers also told the panel that sudden discontinuation of existing restructuring schemes may pose a challenge. On Thursday, the Economic Times newspaper reported that RBI Governor Urjit Patel, at the same meeting with parliamentarians, had ruled out any relaxation in new stressed loan rules. BloombergQuint could not independently verify this.