RBI adopts carrot-and-stick policy for lenders, borrowers

The Reserve Bank of India (RBI) on Thursday made future loans more expensive for borrowers who don’t cooperate in resolving existing bad loans and offered a liberal regulatory treatment for distressed asset sales.

Releasing ‘Framework for Revitalising Distressed Assets’, the RBI said new guidelines aimed at reducing bad loans would be effective April 1, 2014.

The framework proposes allowing lenders to spread loss on sale of such assets over two years provided loss is fully disclosed, among others.

It said the corrective action plan will incentivise early identification of problem cases, timely restructuring of accounts which are considered to be viable, and prompt steps by banks for recovery or sale of unviable accounts.

The framework calls for early formation of a lenders’ committee with time-line to agree to a plan for resolution, apart from extending the take-out financing/ refinancing time for longer period, which won’t be construed as restructuring. Under existing norms a recast loan attracts higher provision.

The framework also offers incentives for lenders to agree collectively and quickly to a restructuring plan under which it will offer a better regulatory treatment of stressed assets if a resolution plan is underway, but will attract accelerated provisioning if no agreement can be reached.

Seeking improvements in the current restructuring process, the framework allows independent evaluation of large value restructuring, with a focus on viable plans and a fair sharing of losses (and future possible upsides) between promoters and creditors.

It also moots steps to enable better functioning of asset reconstruction companies, apart from encouraging sector-specific companies/private equity firms to play active role in stressed assets market.

It can be recalled that the continuing slowdown in the economy has led to a historic pile of bad loans in the system.

The RBI, in its Financial Stability Report on December 30, had warned that "the strain on asset quality continues to be a major concern… In a base case scenario, with the present conditions continuing, the gross NPAs (non-performing assets) in the system will rise to 4.6 per cent by September 2014 from 4.2 per cent in September 2013 or to about Rs 2.29 trillion from Rs 1.67 trillion a year earlier."

The RBI had released a discussion paper on the subject  on December 17, 2013 and sought comments.

Today's framework incorporates public comments on it and outlines the specific proposals the Reserve Bank will implement, it said.