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New Bad Loan Rules of RBI to Improve the Prospects of Loan Recovery

Norms related to Strategic Debt Restructuring, Scheme for sustainable structuring of stressed assets and other schemes have been withdrawn by the bank on Monday in the later part of the day and has made the process time-bound. The new rules of RBI provide that from March 1, 2018 the lenders are required to implement a resolution within 180 days for accounts of at least Rs 2000 crore
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Reserve Bank of India (RBI) has decided to tighten the norms related to stressed loan which are presently estimated to be above Rs 10 trillion. The decision of RBI will improve the recovery prospects from the bad loans but will require bank provisioning requirement to be kept at an elevated level.

Norms related to Strategic Debt Restructuring (SDR), Scheme for sustainable structuring of stressed assets (S4A) and other schemes have been withdrawn by the bank on Monday in the later part of the day and has made the process time-bound. The new rules of RBI provide that from March 1, 2018, the lenders are required to implement a resolution within 180 days for accounts of at least Rs 2000 crore.

Udit Kariwala, senior analyst financial institutions India Rating said that as per the new norms the first step for lenders is that they have to start finalize and implement resolution plan where the restructuring has been done. The fact that the despite restructuring most cases remain in stress so there is a high probability that most of the cases would go for insolvency proceedings and this will increase the provisioning cost to that extent.

He further added that as per the analysis of rating agency at the end of september indicated that the 12 large banks - 6 each from the pool of private and public banks are sitting on a restructured loan pool including SDR and one other scheme called 5/25 of around Rs 1.9 trillion,

Accounts of thermal power and capital goods sectors are at a high risk of reaching the bankruptcy court.

However, since banks are already increasing the provisioning levels on bad loans due to the undergoing resolution process there may not be materially high cost of provisioning on aggregate basis. Public banks are anyhow looking forward to enhance the provision levels to 55-60% from 45-50%.

Currently the resolution plans for 11 out of 12 accounts provided by RBI in its first defaulter list referred to the bankruptcy court by the lenders. The petitions are also being filed against the 28 accounts from the RBI’s second list of defaulters.

It has been said by the analysts that the new rules such as call for credit rating agencies to evaluate resolution process will enhance the transparency in the restructuring and will enable the lenders to get better price for underlying assets. Despite all this the rules still provide some grey area.

For the proposal which involve interest rate reduction or other sacrifice without having a framework it is not clear how the lenders will work it out. It has been further said by the Crisil’s Sitaram that recovery rates will improve because of new rules as failure to meet the timeline will lead to initiation of insolvency proceeding. The insolvency proceeding has to be concluded within 270 days.

The reduction in recovery period will lead to higher probability of outcome and will preserve value better of the corporates NPA for lenders.

The new norms of RBI provide that in case of change in the ownership structure of defaulting firm in the resolution process the account should not be in default during the time between implementation of plan and date, and 20% of the principle debt should be repaid. The account will be referred to IBC proceedings if there is a default in specified period.

With the new norms in place, there is possibility that the promoters will try to defend their assets by bringing the amount and safeguarding their assets from insolvency and bankruptcy code reference.

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Reviewed by:
Mehak Sharma
Published on 14th Feb, 2018
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