Today, we are witnessing a large spurt in Non-Performing Assets (NPAs) i.e. bad loans in many banks. Most of these loans are from pre-2014, and are only now being classified as NPAs since the RBI has become stringent in such norms over the past 2-3 years. Many of these loans avoided scrutiny over the past few years due to various malpractices and archaic norms. Now the RBI has ushered in a sea change in the way NPAs are to be detected and reported.
First of all, RBI has withdrawn almost 28 odd circulars which dealt with stressed asset resolution and corporate debt restructuring. These 28 circulars were themselves the cause of confusion very often, and are now being replaced by this single instruction now.
Thus, schemes such as Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR), the Scheme for Sustainable Structuring of Stressed Assets (S4A), and the Flexible Structuring of Long Term Loans cease to exist. The Joint Lenders’ Forum (JLF), which was set up to coordinate resolution of large consortium loans, has also been disbanded.
Now, Banks are expected to classify stressed accounts as “Special Mention Accounts” (SMAs) as per the following timelines:
Thus, as per the norms, if either principal or interest is overdue even partly, for even 1 day, the loan gets classified as SMA-0. This sort of strict monitoring is expected to reduce the actual NPAs as banks now will keep track of such accounts from an early stage of deterioration.
Further, banks will report classification of an account as SMA to Central Repository of Information on Large Credits (CRILC) on all borrowers having exposure of ₹ 50 million and above. In addition, banks shall report to CRILC, all borrowers in default (with aggregate exposure of ₹ 50 million and above), on a weekly basis. This weekly collection of data will give a near real-time situation of NPAs.
The CRILC reports help institutions to look at and tackle their NPA or near NPA exposures. It is a data sharing framework that collects data on non-performing assets from all Indian Financial Institutions and then advises the rest of the sector about the state of impairment. All banks can access the data in CRILC.
Further, the circular states that as soon as there is a default in the borrower’s account with any bank, all banks− singly or jointly − shall initiate steps to cure the default. Thus, the chances of tracking a potential NPA and reviving the account before it goes bad, are increased, as all banks will have to initiate action.
This also eliminates the chance of different banks classifying the same borrower’s accounts differently, based on their own discretion. This issue was recently seen in many private banks, where one bank classified an account as stressed, or non-performing asset (NPA), others continued to show the account as standard. This required RBI to force the banks to show the accounts as stressed, thus showing a divergence in NPA reporting.
For large accounts, i.e in respect of accounts with aggregate exposure of the banks at ₹ 20 billion and above, a “resolution plan” is expected to be framed by banks within 180 days of default. The resolution plan (RP) may involve any actions / plans / reorganization including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, sale of the exposures to other entities / investors, change in ownership, or restructuring etc. If banks do not implement such a plan within the timelines, then the account will be referred for insolvency under the Insolvency and Bankruptcy Code.
The resolution plans for ‘large’ accounts (i.e., accounts where the aggregate exposure is ₹ 1 billion and above), shall require independent credit evaluation (ICE) of the residual debt by credit rating agencies (CRAs) specifically authorised by the RBI. Accounts with aggregate exposure of ₹ 5 billion and above shall require two such ICEs. This clause will perhaps ensure that the resolution plans are realistic and feasible, unlike plans made in the past.
The new norms laid down by RBI are a testament to the relentless fight against NPAs which started 2-3 years ago. The revised norms as above will lead to an increase in number of accounts being classified as NPAs in the short-term. But, this will help banks avoid a pile of NPAs, which has been the case so far.