Banks, not RBI, will decide size of bad-loan ‘haircuts’

The Centre’s promulgation of an ordinance last week may have armed the RBI with more powers to deal with the NPA mess in the banking system. But the central bank will not decide on the quantum of “haircuts” that banks need to take as part of the resolution, a senior Finance Ministry official said.

“Haircuts are a commercial decision to be taken by banks. Through this ordinance, the RBI is coming in only to lay out the process. The commercial decision will still have to be taken by the banks,” the official, who requested anonymity, said.

When a bank takes a ‘haircut’, it gives up a part of its claims on a borrower under a debt resolution effort to clean up the bank’s balance sheet, and simultaneously put the business back on the rails. Stressed assets in the banking system have reached unacceptably high levels; the overall NPA level is estimated to be over ₹8 lakh crore.

The official also urged the media not to dwell excessively on the quantum of “haircuts” that banks may have to take in case of debt resolution, stating that such an approach would be “counterproductive” for the economy .

“The media’s excessive emphasis on haircuts can have the effect of triggering a scare among the professionals who are trying to do this. It takes courage to take some of these resolution decisions,” the official said.

The latest NPA ordinance should only be seen as an enabling provision, and the RBI will intervene in only those cases that have gone through a process of resolution and still not been resolved due to various reasons.

Over two-thirds of the NPAs in India are in consortium arrangements or in multiple banking arrangements.

There are still many cases where a loan could not be taken to resolution because of delays in implementing the Joint Lending Forum decision, and even after working of the Corrective Action Plan.

“Through this ordinance, the RBI will have powers to take a look at such cases and direct the banks to initiate insolvency resolution process,” the official added.

On the appointment of Committees, as provided for in the ordinance, the official said the entire system of having such panels, making a reference and getting advice is to supplement the bank’s judgement as to whether due process has been followed or not.

“It is more of a validation. The resolution mechanism comes from RBI guidelines. The committees will not decide the resolution mechanism that has to be followed. The panel would only advice if the mechanism followed by banks is in line with the RBI guidelines or not,” the official said.

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