Even as banks got some relief on reversing of excess provisioning made on sale of bad loans prior to February 26, 2014, their plea for extending the loan restructuring window beyond April 1, 2015 was rejected.
While reversing of excess provisioning will encourage sale of bad loans to asset reconstruction companies, rejection of the plea to retain asset classification benefit on restructuring a loan could see 30-40 per cent of such loans turning into NPAs.
Under the Framework for Revitalising Distressed Assets in the economy, in February 2014, banks were allowed to reverse the excess provisioning on sale of non-performing assets (NPAs) to asset reconstruction companies when the cash received (by way of initial sale consideration and/or redemption of security receipts/pass-through certificates) is higher than the net book value (NBV) of the asset.
This was allowed with a view to incentivising banks to recover appropriate value in respect of their NPAs, subject to certain conditions. This dispensation was, however, available on a prospective basis, i.e., only with regard to NPAs sold on or after February 26, 2014.
No stigma to NPA In addition, RBI Governor Rajan said one should not attribute any stigma to an NPA. “This is a misconception among both borrowers and lenders…there could be legitimate reasons when the borrowers are not paying... Even if the account is an NPA, banks can in fact give new loans, so long as they are being serviced, they cannot be labelled as NPAs,” Rajan said when asked if power producers’ demand for additional loans should be granted.
However, Rajan said it is important for banks to make a calculation if the new loans are in fact necessary to restart the project and that the assets are NPV (net present value) positive.
Cleaning up balance sheets Rejecting the demand for extending the deadline for restructuring, Rajan said, “It is important to clean up banks’ balance sheets and show what they actually contain. This will enhance confidence in the balance sheets and enable the banks to get much needed capital…. Do what is needed including giving more loans if necessary to complete a project but move on beyond that.”