RBI Steps Up Defence Of Its New Stressed Asset Framework

Countering criticism that the recently announced stressed asset framework is too tough, Reserve Bank of India Deputy Governor NS Vishwanathan has argued that the new rules are needed to ensure that the excesses of the last credit cycle are not repeated.

“We don't want to end up in a similar situation a few years down the line,” Vishwanathan said while speaking at the National Institute of Banking Management in Pune.

In a February 12 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.

The provisions drew criticism from the government and bankers. Bankers argued that the need to start working on a resolution after one day of default was unfair. The government argued that the need to refer stressed accounts for insolvency after 180 days would lead to a pile up of cases at the National Company Law Tribunals.

Vishwanathan responded to each of these critiques point by point.

Why The One Day Rule?

The concerns around the strictness of the one-day default rule are unfounded, said Vishwanathan. He pointed out that the rule is not applicable for cash credit accounts. In the case of term loans, Vishwanthan argued, repayment schedules are pre-determined and borrowers have enough notice to organise funds in time.

Non-payment on due dates appears to be seen as par for the course by banks and borrowers. This has got to change, Vishwanathan said while adding that it is no longer good enough to pay by the 30/60/90-day overdue mark.

The deputy governor, however, reiterated that an account would be marked down as a non performing asset only when it was overdue by more than 90 days. There has been no change in that rule.

Also Read: Banks Seek Relief From RBI's New Stressed Asset Rules

The 180-Day Deadline For Resolution

The new stressed asset guidelines require bankers to put in place a turnaround plan immediately after the first day of default. If banks are not able to come up with a plan and implement it within 180 days, the case goes for insolvency and bankruptcy proceedings.

The Indian Banks' Association, in a letter to the RBI and the government, had asked for a 30-day rectification period after the day of default, before they are required to come up with a resolution plan.

However, the deputy governor reminded bankers, that the day of default is a lagging indicator of the stress in the company. Which means that bankers should have been aware of the stress even before the default happened.

He also reiterated that the framework is not applicable for small and medium enterprises .

Why Do Away With The JLF?

Another concern surrounding the new rules is the RBI's decision to do away with the Joint Lenders Forum. Bankers and the government have argued that this leaves them with no forum to discuss a resolution plan, particularly in the case of consortium loans.

Vishwanathan argued that the new framework helps banks by allowing them greater flexibility in tailoring a restructuring plan based on the individual bank's risk policies. He also said that the impression that the new framework requires all lenders to follow the same recognition and resolution policy for a common borrower is incorrect.

Also Read: RBI Gives Provisioning Breather To Banks On NCLT Accounts

The Big Picture

Vishwanathan, through his speech, also tried to explain the regulator's thinking behind the new rules. The new framework follows the principle of an “outcome check” rather than a “process check”, he said.

He explained that bankers need to be alive to any increase in risk in their portfolios so they can move quickly and contain the “loss given default” through loan covenants, increased collateral and higher risk premium.

The Reserve Bank believes the framework is necessary to re-enforce the sanctity of the debt contract and ensure the mistakes of the past cycle are not repeated.

A Footnote....

While focusing on the mistakes of the past and corrective measures taken to reduce stress in large corporate loans, Vishwanathan left bankers with a cautionary note on risks that may emerge in the future.

One such risk could emerge from the recent rush towards retail loans.

-- With assistance from Ridhima Saxena