Vallari Dubey

Complementing the Ordinance on Non-Performing Assets (NPA)[1] which originally brought a whole new breeze in the resolution space in India, RBI has come up with a press release as a further to the first step in crystallizing the concept as laid down in the Ordinance.  RBI has brought a lot of changes for the purpose of implementation of the NPA Ordinance. The Sequel two in the Ordinance story has been released in form of a press release by RBI dated 22nd May 2017, laying down the Action Plan to implement the NPA Ordinance[2].

Points of Action as Tendered

The Action Plan brings forth the relevant steps needed to be taken to arrange for resolution of stressed assets in the Banking Industry. Accordingly, the RBI proposes to set in the following important issues:

Modifications in and re-emphasizing the JLF Mechanism[3]

(i) It has been clarified that a corrective action plan could include flexible restructuring, Strategic Debt Restructuring (SDR) and Scheme for Sustainable Structuring of Stressed Assets (S4A).

(ii) Amongst the changes being made for the aforementioned proposal, a quantum of changes has been in the JLF Mechanism. In line with the same, a latest notification by RBI has modified the existing quantitative criteria required under JLF mechanism to approve a resolution plan. By virtue of which, following changes have been effected:

Consent required for approval of proposal under JLF
Particulars Before RBI Notification w.e.f RBI Notification
By value 75% 60%
By number 50% 50%

(iii) Such banks who did not give their consent on the proposal approved by the JLF have to either exit by complying with the substitution rules within the stipulated time or adhere to the decision of the JLF.

(iv) Participating banks have been mandated to implement the decision of JLF without any additional conditionality to avoid any kind of red-tapism and fulfill the purpose of Corrective Action Plan under the said mechanism.

(v) The Boards of banks were advised to empower their executives to implement JLF decisions without further reference to them, which is again to avoid any unwanted delay in implementation of the proposal.

Oversight Committee

The Apex Bank proposes to revamp the existing Oversight Committee (OC) which currently comprises of two members only. Where the original committee was formed by the Indian Banks Association (IBA) in consultation with RBI, the reconstituted OC shall be under the direct guidance of RBI and is expected to consist of more members. A larger body shall be able to help dealing with the volume of cases referred to OC, which seems to be beyond those under S4A as required currently.

Resolution Framework under IBC

The most crucial part of the Action Plan is supposedly formulating a formal framework, which was the sole intent behind the original NPA Ordinance. The framework is expected to establish a seamless mechanism to deliberate and take actions to refer cases for resolution under IBC. A committee shall be formed to devise and advise requisite plan and strategy for the matter which shall consist of Independent Board Members.

Rating Assignments

Additionally, RBI through this release of action plan, schemes out the suggestion to include the option of rating assignments. RBI believes that credit rating agencies ought to play an important role in the scheme of things. Rating assignments may help preventing rating-shopping or any conflict of interest that may arise otherwise and also exploring for the possibility for the payment to be made for from a fund to be created out of contribution from the banks and the Reserve Bank.

Unconditional Coordination and Cooperation from Stakeholders

The Reserve Bank notes that the proper exercise of the enhanced empowerment would require coordination with and cooperation from several stakeholders including banks, ARCs, rating agencies, IBBI and PE firms, to which end the Reserve Bank would be holding meetings in the near future with these stakeholders.

Why taking prompt steps is important?

Both the original ordinance and the action plan focuses on the term “stressed assets”. It is very much settled that the problem of bad loans in the country is on its worst. If not now then there probably is no later in this scenario.

Making the law in form of an ordinance and taking prompt steps in its implementation are all evidence of how keen and active the Government has become in clearing the balance sheets of the banks and wiping off stressed assets in the nation.

What numbers say?

A latest report issued by McKinsey & Co. titled, “Mastering new realities – A blueprint to transform Indian banking”, May 2017[4], drills down the case and presents an appalling picture.

According to the numbers presented in the report (See Picture 1), the quantum of distressed loan in the country crossed INR 10 lakh Crores in December 2016.

It further highlights the problem for the public-sector banks (PSBs), where stressed assets have surpassed their net worth. Evidently, current provision levels in the bank are seem to be insufficient to beat the odds, with a gap of nearly INR 600,000 crores between the level of stressed assets and the provisions made. It is believed that as these stressed assets continue to turn bad, the entire equity base of the banks could be at risk. Bank Sectors

Picture.1

Source: Mckinsey&Co. Report

Going by the statistics of the report and the comments made thereunder, it is being suggested that if the situation as discussed above, prevails over a period of time from now, the results shall absolutely be disastrous.

This raises fear and makes us realize that we surely have come a long way as far our economy is concerned, but issues as bad as stressed assets in the banking sector may eat up all the hard work along the way for no good reason.

It is indeed direly crucial for the Government to do whatever it takes to pull back the country out of bad loans’ pit fall.

[1] http://www.prsindia.org/uploads/media/Banking%20Ordinance%202017/The%20Banking%20Regulation%20Amendment%20Ordinance%202017.pdf

[2] https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR31388E3F78A130A9405F9891AC490EB2834B.PDF

[3] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/503ACF260214F.pdf

[4]http://www.mckinsey.com/~/media/McKinsey/Global%20Themes/Asia%20Pacific/Mastering%20new%20realities%20A%20blueprint%20to%20transform%20Indian%20banking/Mastering-new-realities-A-blueprint-to-transform-Indian-banking.ashx

(Author is associated with Vinod Kothari & Company and can be contacted at: vallari@vinodkothari.com)

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