RBI’s Crackdown On Bad Loans Credit Positive For Indian Banks, Says Moody’s

The Reserve Bank of India's plan to resolve troubled assets of 12 large borrowers will set a precedent for resolving non-performing loans from smaller borrowers, according to a Moody's Investors Service report. The move is credit positive for Indian banks and will help improve their overall asset quality, the agency added.

The central bank had last week identified 12 companies with stressed assets, representing 25 percent of the banking system's nonperforming assets, to undergo the Insolvency and Bankruptcy Code process. The strict timeline to resolve cases—a maximum of 270 days—will “significantly expedite the resolution process and will help in loan recoveries,” the report said. If a case is not resolved within the stipulated time period, the company will be liquidated automatically, as per the IBC rules.

“Indian banks' asset quality has significantly deteriorated over the years, although the pace of deterioration has somewhat moderated in recent quarters,” the report said. The Finance Ministry, in April, passed an ordinance awarding more power to the RBI to deal with the public sector banks' bad loan crisis.

Also Read: Why RBI Picked These 12 Accounts For Insolvency Action: BQ Explains

Temporary Hit On Earnings

The directive will negatively affect the bank's profitability over the next year if they need to write-down large NPAs, the report added. The central bank, however, has not provided details regarding the provisioning norms yet.

A possible increase in provisions will also accentuate the need for greater capital infusion into weaker public sector banks, it added. Private sector banks, on the other hand, will only feel a limited amount of heat given their “strong profitability and capitalisation”.

The strict timeline, possibly leading to liquidation in some cases could also have a negative impact in cases where little collateral is available, the report said.