Thursday, 22 February, 2018

Banks stocks react sharply to new RBI rules on NPA

RBI tightens noose around defaulters gives banks 180 days to put NPA resolution plan in place Banks stocks react sharply to new RBI rules on NPA
Preston Stone | 15 February, 2018, 16:23

The RBI's plan to scrap existing recast plans and introduce a new system has come at a time when banks are already reeling under bad loans, losses and the rise in bond yields.

Rating agency Crisil said the central bank's move would strengthen the banking system in the long run.

Further, the officials noted that another public sector bank, which is now under the scanner for business dealings with a South African group, is also being probed as the two cases might be linked.

The revised framework has specified norms for "early identification" of stressed assets, timelines for implementation of resolution plans, and a penalty on banks for failing to adhere to the prescribed timelines.

The apex bank has discontinued programmes for banks to restructure their defaulted loans such as corporate debt restructuring (CDR), sustainable structuring of stressed assets (S4A), strategic debt restructuring (SDR), among others, and made the Insolvency and Bankruptcy Code as the main tool to deal with defaulters.

Several analysts termed these schemes as "evergreening" of loans because the banks were giving more loans to the borrowers to prevent them from defaulting.

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Lenders will now have to work out a resolution plan for defaults within 180 days, failing which the account would be referred to the bankruptcy courts.

Should they fail, they will have to refer the account to the Insolvency and Bankruptcy Code (IBC) within 15 days.

Chennai-based public-sector lender Indian Overseas Bank (IOB) on Tuesday recorded a net loss of Rs 971.1 crore for the third quarter ending December 31, 2017, driven by higher provisioning for bad loans. "PSU banks witnessed sell-off as the RBI scrapped a number of loan-restructuring schemes which may lead to further jump in provisions, impacting profitability of these banks", said Vinod Nair, head of Research, Geojit Financial Services. "As soon as there is a default in the borrower entity's account with any lender, all lenders -singly or jointly - shall initiate steps to cure the default", the central bank said on its website. The resolution plan (RP) may involve any actions/plans/ reorganisation including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, the sale of the exposures to other entities/investors, change in ownership, or restructuring.

The lender was also able to make significant recoveries of Rs 3,020.5 crore for the quarter, with a majority of the recoveries coming from small accounts. This information will then have to be reported by lenders to the Central Repository of Information on Large Credits (CRILC) on all borrower entities having aggregate exposure of Rs 5 crore and above with them.

The revised RBI guidelines on resolution of stressed assets entail proactive resolution of the stressed assets whereby the lenders need to finalise the resolution plans as the accounts slips into SMA (special mention account) category.

As per data compiled by ICRA for around 50 large borrowers have banking exposure of Rs2,000cr or more and will need resolution by September 1, 2018, the total borrowings of these companies stand at Rs2.46 lakh crore of debt.

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