While India?s banks, especially those in the public sector space, clearly need to upgrade their appraisal skills, Reserve Bank of India?s (RBI) attempts to put in place a system to quickly identify and tackle a problem asset before it turns into a non-performing asset (NPA) is welcome. Indeed, why centralised reporting and sharing of information relating to large customer accounts hasn?t been introduced all these years is a mystery. In any case, RBI doesn?t want loan restructuring to get any more contagious than it already has; apart from the well-defined process for dealing with distress, the big takeaway from the guidelines would have to be the fact that the central banks wants any loan recast proposal of over Rs 500 crore, via the Corporate Debt Restructuring (CDR) cell, to be vetted by an independent panel. While, in theory, the idea sounds good, given how the track record of auditors or actuaries in India is nothing to write home about, the challenge will be to put together a quality independent panel. Hopefully, though the idea will work and one will not see the recurrence of a Kingfisher Airlines being recommended for a recast.
Given how even a slightly-rotten asset tends to decay fast, RBI is determined to ensure that banks pick up the warning signals early. While the 90-day norm?where a loan is classified as a problem account if interest is overdue for more than 90 days?stays, the central bank has come up with a new category of assets: Specially Mentioned Accounts (SMA). From now on, even if a company is late on its payments of principal or interest by less than 30 days, the banks needs to sit up and take notice, while a delay of over 31 days would necessitate the setting up of a Joint Lenders Forum (JLF). Timelines for tackling such loans are tight?so a JLF would need to finalise a restructuring package within 30 days if lenders find it would be technically viable. To incentivise banks to resolve issues quickly the central bank has said it will allow them better regulatory treatment of stressed assets if an action plan gets under way. However, there are also penalties for dithering and if no solution is found, the assets will attract accelerated provisioning. Allowing banks to sell their loans at a loss and to amortise the costs over two years will help because the hit to the P&L would be staggered. In the short-term, the new guidelines might hurt banks but there?s no doubt the discipline will result in a more alert and nifty banking system. Borrowers beware.
