RBI mounts salvage ops for sinking ships

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ARCs allowed leverage buyouts of stressed firms

The Reserve Bank of India (RBI) on Thursday released the framework for revitalising distressed assets in the economy. The framework outlines a corrective action plan that will incentivise early identification of problem cases, timely restructuring of accounts which are considered to be viable, and taking prompt steps by banks for recovery or sale of unviable accounts. The new norms would be effective April 1.

The framework aims to tackle the growing menace of distressed assets in the country.

With the slowdown of the Indian economy, a number of companies and projects are under stress. As a result, the Indian banking system has witnessed a steady rise in non-performing assets (NPAs) and restructured accounts during the recent years.

According to Reuters, stressed loans in India — those categorised as bad and restructured — total $100 billion, or about 10 per cent of all loans.

As per the new rules, lenders can spread loss on sale over two years provided loss is fully disclosed. Similarly, take-out financing and refinancing is possible over a longer period and it will not be construed as restructuring. RBI has also said the leveraged buyouts would be allowed for specialised entities for acquisition of ‘stressed companies’. It has also mooted steps to enable better functioning of asset reconstruction companies (ARCs).

The framework includes formation of a lenders' committee with timelines to agree to a plan for resolution, incentives to lenders to agree collectively and quickly to a plan, better regulatory treatment of stressed assets if a resolution plan is underway, accelerated provisioning if no agreement can be reached. The framework also focuses on improvement in the current restructuring process, independent evaluation of large value restructurings mandated, with a focus on viable plans and a fair sharing of losses (and future possible upside) between promoters and creditors.

The new norms would result in more expensive future borrowing for borrowers who do not cooperate with lenders in resolution. There would be more liberal regulatory treatment provided for asset sales.

Vibha Batra, senior vice-president, co-head, financial sector ratings at Icra Ltd, said, "Right now, the central bank has access to the 90 days plus delinquencies in the system. In the new framework, RBI will have more granular data on the credit quality of banks with information even on the 30 days plus delinquent accounts for more than Rs 5 crore (funded and non-funded credit)."

"This would also facilitate early dissolution of stressed accounts. However there would be a rise in NPAs as the lenders migrate to report uniform asset classification of non-performing assets," Batra added.

The RBI has also tried to incentivise banks to sell bad loans to asset reconstruction companies (ARCs).

“With a view to bringing in uniformity as also incentivising banks to recover appropriate value in respect of their NPAs promptly, the RBI will allow banks to reverse the excess provision on sale of NPA if the sale is for a value higher than NBV to its profit and loss account in the year the amounts are received,” said RBI.

RBI would allow banks to spread over any shortfall, i.e., if the sale value is lower than the NBV, over a period of two years. This facility of spreading over the shortfall would, however, be available for NPAs sold up to March 31, 2015 and will be subject to necessary disclosures, the central bank said. A public sector bank official said, “We could see a significant sale of stressed assets to ARCs and some provisioning release for banks if they are able to sell assets at a price higher than the book value.”

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