Staying on course to resolve the bad loan problem plaguing the banking sector, the Reserve Bank of India (RBI) outlined the further steps it plans to take, such as expanding the oversight committee (OC) and its mandate, modifying existing debt recast rules, and engaging rating agencies for timely action.
The central bank will reconstitute the OC and expand the panel to include more members. The existing OC, which has two members, was constituted by the Indian Banks' Association. The RBI will now reconstitute the OC under its aegis and the two current members will continue in the revamped panel. The larger OC could then set up benches to deal with the volume of cases referred.
The RBI will also expand the scope of cases to be referred to the OC beyond those under S4A (Scheme for Sustainable Structuring of Stressed Assets) as required currently. The RBI is also developing a framework for an “objective and consistent” decision-making process for resolution under the Insolvency and Bankruptcy Code, 2016 (IBC).
The banking regulator also sought information on the current status of the large stressed assets from the banks. It would constitute a committee comprising a majority of its independent board members to advise it in this matter. The Banking Regulation (Amendment) Ordinance, 2017, has empowered the RBI to issue directions to initiate insolvency resolutions for default under the provisions of the IBC.
The RBI is also likely to modify the guidelines on restructuring to resolve the large stressed assets in the banking system.
The RBI wants rating agencies to play a vital role in the resolution process. “With a view to preventing rating-shopping or any conflict of interest, the RBI is exploring the feasibility of rating assignments being determined by the RBI itself,” the central bank’s statement said. Rating agencies would be paid from a fund to be created out of contributions from the banks and the RBI.
The RBI further said the enhanced empowerment would require coordination with and the cooperation of several stakeholders including banks, asset reconstruction companies, rating agencies, and private equity firms. It will soon hold meetings with these stakeholders.
Immediately after the promulgation of the Ordinance by the government, the RBI had issued a directive bringing changes to the existing regulations on dealing with stressed assets. The statement said a corrective action plan could include flexible restructuring, strategic debt restructuring, and S4A. The consent required for approving a proposal in a Joint Lenders’ Forum (JLF) has been liberalised. If an asset is to be subject to the corrective action plan, 50 per cent of the creditors in the JLF have to agree on the plan and they must account for 60 per cent (against 75 per cent earlier) of the asset by value. These changes were made to facilitate decision making in the JLF. Banks which were in a minority on the proposal backed by the JLF would have to either exit by complying with the substitution rules within the defined time or adhere to the decision. Participating banks had also been mandated to implement the decision of the JLF without any additional conditionality.
The boards of banks were advised to empower their executives to implement JLF decisions without further reference to them. Those lenders who fail to adhere to rules would face enforcement actions, the RBI had said.
