The Reserve Bank of India’s latest move to simplify the resolution framework — doing away with all old restructuring schemes in the process — comes as no surprise, given the pace at which bad loans are surfacing again. Following the RBI’s first asset quality review (AQR) two years ago, state-owned banks had reported sharp slippages and a whopping ₹2.7 lakh-odd crore of bad loans were added to the system in fiscal 2016. This had suggested that the worst was over, but the slowdown in the accretion to bad loans has proved temporary — nearly ₹1.7 lakh crore NPAs were added in just the first nine months of the current fiscal. Clearly, a significant portion of NPAs had been swept under the carpet by banks under the guise of various restructuring schemes. The RBI has rightly stepped in to flush out the rot in banks’ books under CDR, SDR, S4A or 5/25, by withdrawing them and placing them under the new framework. Banks will now have to begin the resolution process on an account as soon as it is classified as an SMA-0 account — where payments are overdue by 1-30 days — by any one bank within a consortium. This rightly addresses the key reason behind steep divergences reported by banks in recent times.

Aside from tightening the norms for reporting of default to the central repository, the new framework nudges banks to act quickly by setting a timeline for resolution. In respect of accounts with aggregate exposure of ₹2,000 crore and above, lenders will have to draw up a resolution plan within 180 days from March 1, 2018 (or default date as the case may be), failing which banks will have to refer the case for insolvency under the IBC. The RBI has also left little room for shaky resolution plans, which will now need the approval of credit rating agencies and will have to deliver results; at least 20 per cent of the outstanding principal and capitalised interest will have to be repaid for the account to be upgraded back to ‘standard’.

While the new framework will help hasten recognition of NPAs, there are several other issues that need attention. For one, banks will have to make higher provisioning — 15 per cent when an asset’s restructured and 50 per cent if referred to the IBC. With around ₹2 lakh crore of loans likely to come under the revised framework, capital issues could rankle PSBs yet again. The requirement of all lenders agreeing to the resolution plan could also prove challenging. Whether the existing infrastructure under the IBC set up will be able to deal with the expected deluge of insolvency filings is another issue. Above all, the new framework still deals with the stock of the NPA problem and not the flow. A clear roadmap for the Centre to divest its stake in PSBs and granting more autonomy to bank boards is imperative to avoid a repeat of the bad loan mess.

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