RBI’s helping hand to banks - August,
2020
Who else but RBI to come to the rescue of Indian banks, groaning under several loads, bad loans being the heaviest, that have rendered them almost crippled? In February, 2018, RBI issued a direction to Banks[1] with a stern instruction to resolve non-performing loans of large corporate borrowers, even identifying the 12 largest and most painful borrowers. Not just that, the direction also mandated a clear break from the past goading banks to move towards time-bound resolution of bad loans by putting to use the new Insolvency & Bankruptcy Code (IBC) and the very way banks recognize default. Due to the legal challenges that this instruction faced, RBI came out with revised direction in June, 2019[2] that retained the gist of the February, 2018 direction. Both of these kept the stressed Small & Micro loans, exposures to finance companies, and retail loans out of their purview.
The moratorium on loan servicing announced by RBI ends by August 31, 2020 after an extension. Obviously, moratorium is only a pause, to help businesses and individuals to manage with the lockdown and consequent economic fall out and was just a temporary relief during a crisis, at best, something that could not continue. Banks have also been very apprehensive of the health of their loans as the interest and installment s for the moratorium period will need to be collected in September even though the economic fallout of the pandemic, that is still expanding its spread, is deep and will last for years, certainly not months. Thus, an extraordinary measure to provide relief to Banks, yet to fully overcome the legacy loan impairment problem, who fear a major hit on their loan portfolios, has been , not just an expectation, but a necessity. On August 6, 2020, RBI has issued a resolution framework[3] for stressed loans, specifically caused as a collateral damage of Covid-19 pandemic. Given that even the latest direction also dealt only with large borrowers (with aggregate exposure of at least Rs. 25 crores), it is obvious that, not only is large bad loan resolution very much a work in progress, it is only getting bigger.
The latest direction, unlike both of February, 2018 and September, 2019, has not left the resolution structures to the Banks. It has been left to be devised and even monitored by an expert group headed by K.V. Kamath, ex-ICICI Chairman, just back after stint as President of New Development Bank in Shanghai. Banks have largely used the structures, , that had been mandated by RBI earlier from time to time, but withdrawn while issuing the February, 2018 direction, with slight modifications and customization for resolving their impaired assets. The resolution mechanisms have included loan restructuring by extending the servicing periods, separating a non-serviceable portion to be converted into a security, reducing the interest rate, replacement of the promoter by another investor, change of management, conversion of a portion into equity, writing off a portion of the loan as loss and if none of these are feasible or fail, liquidation through the IBC framework.
It is not as if everything has been left to the expert group to decide. The framework within which any resolution plan is implemented by Banks, has be advised by RBI. The broad contours are:
· The new framework is applicable only to
o personal loans, corporate exposures and MSME exposures exceeding Rs. 25 crores.
o loans that were classified ‘standard’ and were not in default for more than 30days on March 1, 2020 and on the day the resolution plan is invoked.
· Where more than one lender is involved, the resolution plan should have the approval of at least 75% by value and 60% by number of the lenders.
· The resolution plan should be invoked before December 31, 2020 and should be implemented within 90 days for personal loans and 180 days for non –personal loans.
· The expert committee will vet the resolution plan for all exposures of Rs. 1,500 crores or more.
· Any extension in the loan servicing term should not exceed 2 years.
· While conversion of loans into non-convertible security or equity should stick to the guidelines already in place under the prudential norms[4], conversion into any other security should be at a collective value of Rs. 1.
· In case of personal loans that are put through a resolution in this framework, Banks should provide as per the existing norms for loan loss provisioning[5], minimum 10% of the renegotiated loan under this framework.
· Banks can write back the additional provisions made in two stages provided the borrowers repay at least 20% and another 10% of the renegotiated loan.
· If there is a default on a non-personal loan under resolution monitoring period till payment of the second installment of 10%, a review period of 30 days is triggered. If there is no payment within the notice period and the loan remains in default, the loan will be classified as NPA.
It becomes clear that this framework is exclusively for the help of borrowers to manage the liquidity and loss of business due to the pandemic. Neither banks for their existing stressed portfolios nor the delinquent borrowers can hope to get any relief in this framework.
It demands very swift and systematic action by bankers to identify the eligible borrowers and implement workable resolution plans within tight timelines, something that neither Banks nor the borrowers have a good past record in. But then, it is a need, more of the borrowers and banks themselves, more than of the regulator. We will be able to see within a year if this worked and to what extent.
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