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To tackle the problem of bad loans in the banking system, the Reserve Bank of India is planning to put in place a carrot-and-stick regime by incentivising efforts to make recoveries and penalising slack.
To spur banks/financial institutions to agree collectively and quickly to a plan of resolution of stressed assets, the RBI held out the hope of a liberal regulatory treatment.
This includes spreading the loss on sale of the asset over a period of two years; allowing takeout financing/refinancing over a longer period and not considering the same as restructuring.
Special accounts In case lenders cannot reach an agreement on resolution of stressed assets then they will be subject to accelerated provisioning.
In its discussion paper on ‘Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders’, the RBI said before a loan account turns into a non-performing asset (NPA), banks should identify incipient stress in the account by creating a new sub-asset category — Special Mention Accounts (SMA).
SMA is a special account created for reporting a standard account, which is moving towards the substandard category.
SMA will have three sub-categories — SMA-NF (classified on the basis of non-financial signals); SMA-1 (when principal or interest payment is overdue between 31-60 days); and SMA-2 (when principal or interest payment is overdue between 61-90 days).
Central repository The RBI plans to set up a Central Repository of Information on Large Credits (CRILC) to collect, store, and disseminate credit data to lenders. Banks will have to furnish credit information to CRILC on all their borrowers having aggregate fund-based and non-fund-based exposure of Rs 5 crore and above. Systemically important non-banking finance companies (NBFC-SIs) will also be asked to furnish such information. In addition, banks will have to furnish details of all current accounts of their customers with outstanding balance (debit or credit) of Rs 1 crore and above.
Banks will be required to report, among others, the SMA status of the borrower to the CRILC. Individual banks will have to closely monitor the accounts reported as SMA-1 or SMA-NF as these are the early warning signs of weaknesses in the account. They should take up the issue with the borrower with a view to rectifying the deficiencies at the earliest.
However, to start with, reporting of an account as SMA-2 by one or more lending banks/NBFC-SIs will trigger the mandatory formation of a Joint Lenders’ Forum (JLF) and formulation of Corrective Action Plan (CAP).
In cases where banks/NBFCs-SIs fail to report SMA status of the accounts to CRILC or resort to methods with the intent to conceal the actual status of the accounts and the accounts subsequently turn NPAs, the RBI may prescribe accelerated provisioning.
Joint Lenders Forum JLF formation would be made mandatory for distressed corporate borrowers with aggregate fund-based and non-fund based exposure of Rs 100 crore and above.
JLF will explore various options to resolve the stress in accounts. The intention of the stressed assets resolution framework is not to encourage a particular resolution option, example, restructuring or recovery, but to arrive at an early and feasible resolution to preserve the economic value of the underlying assets as well as the lenders’ loans.
The options under the CAP by the JLF would generally include: rectification (for regularising the loan account), restructuring and recovery (when the first two options fail).
Restructuring To ensure that promoters have more ‘skin in the game’ when their loan is recast, JLF/Corporate Debt Restructuring Cell may consider: possibility of transferring promoter’s equity holding in the company to the lenders to compensate for their sacrifices; promoters infusing more equity into their companies.
Further, transfer of the promoters’ holdings to a security trustee or an escrow arrangement till turnaround of the company needs to be considered. This will enable a change in management control, should lenders favour it.
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