RBI draws tighter rules to tackle surging bad debt

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The Reserve Bank of India (RBI) has initiated a framework for speedier resolution of bad debts to liquefy the balance sheets of companies and for better recovery of money.

The draft framework is aimed at helping banks resolve cases amicably and get projects running. RBI is in discussion with the government to amend the debt recovery tribunal Act and make the asset reconstruction companies (ARCs) more efficient. It plans stringent measures to revive projects by providing incentives to genuinely-distressed promoters and punish wilful defaulters.

Wilful defaulters in the banking system will invite higher provisioning for all fresh loans; and promoters who cooperate with banks to alleviate a project’s genuine stress will have lower provisioning, according to the draft. It also proposes a more liberal regulatory treatment of sale of bad assets.

For early warning signals, banks will create a new category of ‘special mention accounts’ (SMA) where the principal or interest payment overdue for 30 days or more will trigger action by banks.

In the existing guidelines principal or interest overdue for 90 days is classified as a non-performing asset (NPA). RBI will set up a ‘central repository of information’ on large credits to collect, store and disseminate credit data to the lenders.

The repository will collate information on all types of exposures, including a bank’s investment in bonds and debentures issued by a borrower. In addition, banks will have to furnish details of all current accounts of their customers with an outstanding balance of Rs 1 crore or more.

RBI has invited comments from bankers and the public on the draft within a next fortnight, after which the final guidelines will be issued.

Senior RBI officials in a media interaction said, “The idea of the framework is to put assets back on track so that they are economically viable. The intention is to help creditors recover their dues, to liquefy the balance sheets of genuinely distressed borrowers so that they can invest money into other projects or make existing projects give back returns.

It is also to prevent bankers and promoters from entering sweet deals detrimental to the larger interest of the banking system and also to prevent bankers from greening their balance sheets in the guise of restructuring.

For restructuring of large loans, RBI may make it mandatory for independent directors to give a view on the restructuring mandates with a focus on viable plans, a fair sharing of losses and future possible upsides between promoter and creditor.

RBI intends to make it easier for banks to get rid of stubborn loans by selling them to ARCs. Profits from such sales will go directly into the P&L accounts and losses, if any, can be amortised over of two years.

Another proposal is the creation of a joint lenders’ forum (JLF) to formulate a joint corrective plan for early resolution of stress in an account. The JLF will handle problem loans of Rs 100 crore or more. Lenders may also be allowed to have a JLF for exposures below Rs 100 crore. For exposures of Rs 500 crore and more, the corporate debt restructuring cell will have to come out with a decision in the next 30 days.

To help existing infrastructure projects, RBI also plans to facilitate refinancing options where the projects can be refinanced by other institutions, which can take over loans from banks of a borrower.

The refinancing institutions can fix a repayment period by taking into account the life cycle of and cash flows from the project. In such cases even if the revised repayment period is longer than the residual repayment period in the original lenders’ books, the account will not be considered as restructured as long as proper due diligence has been done by the refinancer.

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