No New Bad Loan Resolution Plan Yet, But The Promise Of One

The Reserve Bank of India (RBI) and the government are discussing new options, including sector-specific and size-specific mechanisms, to speed up resolution of bad loans, said deputy governor SS Mundra on Thursday.

“I think there is a clear acknowledgement and recognition that the asset quality situation in which we are, there is no one size, which fits all. There would be case specific instruments, which would be required to be deployed,” said Mundra during the press conference which followed the central bank's first monetary policy review of the financial year.

While Mundra did not detail the options that the RBI and the government are working on, he gave some hints.

The RBI is considering the possibility of ensuring faster implementation of decisions made by Joint Lenders' Forum; increasing the number and ambit of oversight committees; and introducing sectoral or size specific rules for resolutions.

The brain storming on ideas to fix the bad loan problem comes at a time when total bad loans in the system have ballooned to over Rs 7 lakh crore as of the end of the December quarter. Schemes introduced by the RBI to help clean up bad loans have not had much impact so far.

In February, Deputy Governor Viral Acharya also suggested fresh structures through which bad loans could be resolved.

In seeking a optimal structure for resolving stressed assets in India, Acharya suggested two models – A Private Asset Management Company (PAMC) and A National Asset Management Company (NAMC). These, he said, would be different from asset restructuring companies, and would be along the lines of resolution agencies.

While the proposed PAMC may be useful for sectors such as steel and textiles where some sectoral recovery is in sight, the NAMC model could be applied in cases where the asset may appear to be unviable in the short to medium term.

The RBI, however, will not move back to the days of forbearance, said RBI governor Urjit Patel while referring to a period when provisions like corporate debt restructuring allowed banks to under-provide for stressed assets.

“Further creeping forebearance in the treatment of bank losses is untenable and costly for the rest of the economy,” said Patel in his opening statement.

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Review Of Prompt Corrective Action Framework

The RBI, having completed its asset quality review (AQR) exercise, is now increasing its focus on ensuring that bank balance sheets are strengthened.

In a statement today, the RBI stated that the existing framework on prompt corrective action for banks has been reviewed and updated, and the changes would be notified to banks by mid-April.

Under the current prompt corrective action framework, the RBI places operational restrictions on banks if they underperform on three key parameters–capital adequacy, bad loans, and return on assets. The RBI stated that banks' leverage would now be monitored under this framework.

The non performing assets (NPA) resolution framework still seems to be work in progress, said Rajnish Kumar, managing director at State Bank Of India in a reaction to BloombergQuint.

"The statements made by the RBI suggest that there will be some policies for resolution of NPAs at the individual account level and that is the right approach. For the large corporate accounts, each case is very different and there cannot be and should not be a common prescription,” said Kumar.

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