RBI’s new framework brings one ‘gateway’ for NPA resolution

The Reserve Bank of India (RBI) has once again talked tough against rising stressed assets of banks, eliminating series of schemes and replacing them with Insolvency & Bankruptcy Code.
 
As public sector banks are passing through a bad phase due to high non-performing assets (NPA), resolution of their problem would not only revive the lenders but also the country’s economy.
 
RBI in its report titled ‘Resolution of Stressed Assets – Revised Framework’ made a major change by withdrawing a series of stressed asset resolution schemes with immediate effect. 
 
These schemes include Revitalising Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR, and Scheme for Sustainable Structuring of Stressed Assets (S4A).
 
All these schemes have been replaced by Insolvency & Bankruptcy Code (IBC).
 
The move brings clear boundaries for solving NPA crisis, and the banks are left with no option but to adhere to the RBI’s regulation.
 
According to the “Statistical Tables Relating to Banks in India: 2016-17” report, a total of Rs 67,100 crore was brought by Scheduled Commercial banks (SCB) in FY17 under Debt Recovery Tribunal (DRT), however, only Rs 16,400 crore was recovered which was just 24% of the total NPA.
 
Considering this lackluster performance of banks, analysts have given cautious outlook on the sector for FY2018.
 
The National Company Law Tribunal (NCLT) is the forum where cases relating to insolvency of corporates will be heard, while DRIs are the forum for insolvency proceedings related to individuals and partnership firms.
 
Experts, however, believe that the latest development is in sync with the best practices across developed economies.
 
The RBI is motivating banks to take advantage of the IBC to clean their balance sheet and improve performance on a sustained basis to remain competitive. The central bank has also asked lenders to opt for IBC proceedings on their own, rather than waiting for regulatory instructions.
 
RBI is also identifying wilful defaulters for IBC resolution under the National Company Law Tribunal (NCLT). So far, it has identified 40 wilful defaulters of banks in two lists.
 
On February 12, RBI revised the IBC framework by tightening norms for large accounts worth Rs 2,000 crore or above.
 
The large accounts are those where resolution process has been initiated under any of the existing schemes as well as accounts classified as restructured standard assets.
 
For such accounts, RBI has decided two new timelines which will be come into effect from March 2018. Firstly, if in default as of the reference date, then 180 days from the reference date, and secondly, if in default after the reference date, then 180 days from the date of first such default.
 
RBI highlights that if an RP in respect of such large accounts is not implemented as per the specified timelines, then lenders shall file insolvency application, singly or jointly, under the IBC within 15 days from the expiry of the said timeline.
 
If RP involving restructuring/change in ownership is implemented within the 180-day period, the account should not be in default at any point of time during the ‘specified period’, failing which the lenders shall file an insolvency application, singly or jointly, under the IBC within 15 days from the date of such default, according to the RBI.
 
This specified period means the period from the date of implementation of RP up to the date by which at least 20% of the outstanding principal debt as per the RP, and interest capitalisation sanctioned as part of the restructuring, if any, is repaid.
 
Also, any default in payment after the expiry of the specified period shall be reckoned as a fresh default for the purpose of this framework.
 
Not only the large accounts were taken care under IBC, but RBI also made sure that lower accounts namely below Rs 2,000 crore and, at or above Rs 100 crore, RBI intends to announce, over a two-year period, reference dates for implementing the RP to ensure calibrated, time-bound resolution of all such accounts in default.
 
Alka Anbarasu, senior analyst, Moody’s Investors Service in a BloombergQuint report, said, "The process still provides over one year to resolve the problem assets -- initial 180 days to implement the Resolution Plan, and then another 270 days (180+90 days), if required, under the IBC. As such, the timeline should be sufficient to come up with a viable solution."
 
It may be noted that the Finance Ministry in Economic Survey 2018 made it clear that the agenda for the next financial year would be to repair the fractured areas of economy.
 
The Economic Survey also stated that new Insolvency and Bankruptcy code (IBC) was helping improve the health of banking sector despite the fact that the banks', especially public sector banks (PSBs), asset quality remained stressed in the current financial year.
 
Analysts are optimistic about the IBC mechanism for NPA resolution.
 
Kajal Gandhi, Vasant Lohiya and Vishal Narnolia analysts at ICICI Securities, earlier said, “PSU banks would remain key beneficiaries of resolutions expected under IBC as they were the worst hit in terms of NPA & provisioning expenses.”
 
It may be noted that IFRS 9 will be applicable globally from January 1, 2018, while it would be effective in India from April 1, 2018.
 
India Ratings believes PSBs’ capital consumption to remain high, given that profit and loss accounts (P&L) for most of banks (especially mid-size PSBs) would remain under pressure due to accelerated provisioning requirement on the accounts identified by the regulator for reference to the National Company Law Tribunal under the Insolvency and Bankruptcy Code in FY18.
 
Gross NPA of banks continue to increase by 34.5% in Q3-FY18, on top of 59.3% of the last year, while NPA ratio had touched 9.45% from 8.34% in December 2016.
 
Care Ratings said, “It does appear that the NPA issue is still not sorted out at the macro level in terms of recognition as well as accretion."
 
"The greater the delays in the early cases, the greater the risk that uncertainty will soon shroud the entire IBC process,” the survey added.