50% provisions for IBC accounts "very reasonable": RBI's Acharya

Deputy Governor Viral Acharya today confirmed the Reserve Bank has asked banks to set aside 50 per cent provisions for accounts being resolved through the insolvency law, and termed the same as "very reasonable".

"I think it is better to mark the books ahead of time, I think 50 per cent is a very reasonable level of provisioning given...The historical record," Acharya told reporters here.

"I think the provisions are very reasonable based on any historical recovery rates that banks even on secured debt have typically earned in out system," he added.

The deputy governor incharge of monetary policy making said till now, the banks have neglected the crucial aspect of provisions against the expected losses which have resulted in lack of success in earlier resolution attempts.

"If you think about the CDR (corporate debt restructuring) scheme or the SDR (strategic debt restructuring) scheme, they have been primarily used to not provision for these assets rather than to actually resolve the underlying assets," Acharya explained.

"In my opinion, going about the same way, again the third time will not be appropriate," the academic-turned- central banker said.

Media reports earlier this month had said that the banks have been asked to set aside 50 per cent as provisions on the 12 identified accounts to be dealt with under the provisions of the insolvency and bankruptcy code (IBC).

The RBI had not come out with a notification on the provisions aspect after declaring the names of the accounts to resolved.

Some estimates had pegged the total provision to be made against the exposures at Rs 40,000 crore, which had led to investor anxiety which was seen in correction in banking stocks.

Country's largest lender SBI said that it does not expect a huge hit on the bottomlines, while third largest from the private space, Axis Bank, came out with details of exposures and provisions made to drive the point of it being guarded adequately.

The largest 12 accounts named by RBI are Bhushan Steel, Lanco Infra, Essar Steel, Bhushan Power, Alok Industries, Amtek Auto, Monnet Ispat, Electrosteel Steels, Era Infra, Jaypaee Infratech, ABG Shipyard, and Jyoti Structures. These companies together owe more than Rs 2 trillion to banks. These accounts have not been serviced since March 2016.

Of these six accounts have already been sent to NCLT by banks --Bhushan Steel, Essar Steel and Electrosteel Steels by SBI; Bhushan Power by PNB; Lanco Infratech by IDBI; and Amtek Auto by Corporation Bank-- for possible liquidation.

Acharya termed the steps taken by the central bank till now as "significant" and said we should expect more to follow suit.

"The good news is that we've embarked on the cleanup process, we are working with the Govt on this and as you know we've already taken some significant steps forward, more will follow. We are hoping that over the next year or two we can actually grapple with the problem in full capacity," he said.

Acharya was speaking on the sidelines of the launch of former RBI Governor Y V Reddy's book : Advice and Dissent, My Life in Public Service here.

"On an operational basis, we enjoy remarkably good operation definition of independence at the Reserve Bank, even though it is within the parameters that the government sets," Acharya, who is five months into his stint and is a part of the rate-setting Monetary Policy Committee which refused to meet FinMin officials ahead of the last review, said.

"These kind of political independence dialogues are not just specific to India, they affect every single central bank in every part of the world," he added.

On the currency front, Acharya said the markets may be going through a period of low volatility at present.

Reddy said the structure of state-run banks in India is "inconsistent with modern market economics" where the political economy considerations play a dominating role.

Reddy added that RBI was not aware of bank nationalisation carried out in 1969 and did not support it.

"It was not a well considered, analysed decision taken. In that sense, like Planning Commission...If the birth is due the whims of the Prime Minister, then death is also due to the whims of the Prime Minister," Reddy said to a loud laugh in the audience.