Resolution reset

The RBI’s Prudential Framework for Resolution of Stressed Assets, a diluted version of a February 2018 circular struck down by the Supreme Court, marks a break from the existing debt resolution framework. The norms address the apprehension, in some cases valid, that stringent bankruptcy norms can disrupt credit growth and industrial activity. It is, however, not clear how the new framework, an attempt at rebalancing, will help banks or the economy. First, it does away with the one-day default mandate, and gives banks a 30-day window to contemplate on the resolution strategy. Second, and crucially, it gives banks greater discretion to deal with stressed assets; taking defaulters to insolvency court is voluntary. Earlier, banks had to refer the case under IBC if a resolution failed within the 180-day deadline. The new circular instead imposes additional provisions on failure to reach a resolution within the stipulated period — 20 per cent if the 180-day deadline is breached and another 15 per cent after 365 days. The RBI can, under Section 35AA of the Banking Regulation Act, direct banks to initiate insolvency proceedings against ‘specific borrowers’ under IBC, following an authorisation by the Central Government. Lastly, the framework now applies to a larger universe of lenders. However, the provisions of the directive will get triggered only if the borrower defaults repaying either a scheduled commercial bank, small finance banks or financial institutions such as NABARD, NHB, EXIM Bank, and SIDBI; the intent to include NBFCs appears to be only to bind them under the framework in the case of multiple lenders.

The new directive has now left it to banks to deal with stressed assets — back to how it was before the February 2018 circular was issued. Given that the core issues of evergreening of loans and banks’ unwillingness to take decisions still persist, it is unclear how imposing provisions alone can speed up resolution, with many of the large accounts already close to hitting the 100 per cent provisioning cap. Also, while the new directive provides incentives in the form of reversal of additional provisioning to refer cases to the IBC, banks are unlikely to hustle cases into insolvency given the dismal progress under IBC. The new rules, therefore, must be accompanied by moves to speed up IBC resolution, with an accent on revival.

However, weak capital and a large stressed assets book can hamper banks’ ability to step up lending. Importantly, the main bone of contention with the earlier circular was its one-size-fits-all approach, which the new directive has failed to address. Of the ₹3.8-lakh crore of debt under question, ₹2-lakh crore pertains to the power sector, where structural issues continue to impede resolution under IBC or outside. Above all, the new government must grant autonomy to bank boards. Hard-hitting decisions will not be taken if bankers continue to fear repercussions of their actions.

COMMENT NOW