The Non-performing Assets (NPAs) or bad loans of banks have increased to alarming levels. Currently, the NPA ratio in Indian banks stands at 9.45 % of gross loans.
The RBI has overhauled its stressed asset resolution framework to ensure speedy resolution of bad loans in the future.
What are stressed assets?
Stressed assets = Non-performing Assets (NPAs) + restructured assets + written-off loans.
- The NPAs are assets that have stopped generating income for a bank. Bank’s assets comprise of loans. When these loans are on the verge of default (that is, about to go bad), they are classified as NPA. In India, a loan is classified as NPA, if the interest or any instalment on the loan remains unpaid for a period of more than 90 days.
- Restructured loans/ assets are loans of which the terms and conditions have been modified. (like repayment period increased, interest rate reduced, loan converted into equity etc.)
- Written-off loans are the loans (NPAs) that have been taken off from the balance sheet to clean off the books.
(Read: Loan write-off is not a waiver).
What is the resolution of stressed assets?
Resolution means that the bank will take control of the defaulting institution either to restructure or liquidate them.
What is the new stressed asset resolution framework?
- Several stressed asset resolution schemes were introduced over the past few years. They have become redundant with the passage of the new and comprehensive Insolvency and Bankruptcy Code or IBC in 2016.
- Therefore, the RBI has put an end to these stressed assets resolution schemes.
- Some of the schemes that have been subsumed by IBC are Strategic Debt Restructuring (SDR), the Scheme for Sustainable Structuring of Stressed Assets (S4A), and the Corporate Debt Restructuring (CDR) scheme.
- The Joint Lenders’ Forum (JLF) which is an institution that had been set up for coordination of negotiations between the banks and the borrower has also been disbanded.
- As per the new framework, an account will be identified as a stressed account immediately upon default.
- The Banks must report defaults on a weekly basis (every Friday) to RBI in the case of borrowers with more than 5 crore loan, effective from February 23, 2018.
- The banks must also report credit information on a monthly basis in the case of borrowers with more than 5 crore loan, effective from April 1, 2018.
- As soon as there is a default all lenders − singly or jointly − shall initiate steps to cure the default.
- The RBI has put in place a strict timeline over which a resolution plan must be implemented for accounts with an exposure of Rs.2000 crores or more.
- Banks will have to ensure that a resolution plan is in place within 180 days after a ‘default’.
- If the resolution plan is not implemented within 180 days, the account must be referred to the IBC within 15 days of the expiry of the deadline.
- The resolution plan (RP) may involve:
- Regularisation of the account by payment of all overdue by the borrower entity
- Sale of the exposures to other entities/investors
- Change in ownership
- Restructuring
What will be the impact of the new stressed assets resolution framework?
- The new framework will strengthen the banking system by bringing in much-needed transparency.
- Though it will increase Non-performing assets (NPAs) of the banks in the coming quarters, it will be positive for the banks in the long run. The banks will not be able to delay the recognition of an asset as non-performing due to the strict guidelines requiring faster recognition and resolution of stressed assets.
- There have been large divergences in the bank’s and RBI’s assessment of NPAs. SBI reported a divergence of Rs.23239 crores at the end of March 2017. These divergences will not occur if the new framework is implemented properly.
- But, the increase in NPAs will require increased provisioning as well which will further hit the profitability of the banks in the short run. This is a transition pain which is inevitable.
- It will inculcate discipline in the corporate sector and end the culture of default that is pervasive currently. The banks will also become more prudent in lending
- But, as per the new framework, all lenders must agree on the resolution plan. It is difficult to reach consensus if there are many lenders/ banks involved.
- It could affect business sentiments as genuine defaults will be handled in the same way.
- It will also hamper credit growth in the short run.
You may also read-
The Bank Recapitalisation Explained
Understanding the Insolvency & Bankruptcy Code
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References-
RBI Notification on the new framework