Following the promulgation of the Banking Regulation (Amendment) Ordinance, 2017, the Reserve Bank of India (RBI) on Monday outlined a framework to tackle the high amount of bad loans on banks balancesheets.
Steps would include reconstituting the oversight committee, constituting a committee comprising mainly of its independent board members that could advise on referring large stressed accounts for resolution under the Insolvency and Bankruptcy code.
In addition, the RBI also said that it is exploring the feasibility of rating assignments being determined by itself and paid for from a fund to be created out of contribution from the banks and the Reserve Bank.
The total stressed assets in the banking system had already crossed the Rs 10 trillion-mark. In fact, the Asset Quality Review (AQR) introduced by the RBI in 2015 had forced a lot of banks to make a more realistic classification of accounts and also provide for losses more realistically.
This had forced many state owned banks and a few private sector banks to take a fairly large hit on the bad assets front.
Currently, the oversight committee (OC) comprises two members. It has been constituted by the Indian Banks Association in consultation with RBI. It has been decided to reconstitute the OC under the aegis of the Reserve Bank and also enlarge it to include more members so that the OC can constitute requisite benches to deal with the volume of cases referred to it. While the current members will continue in the reconstituted OC, names of a few more will be announced soon. The Reserve Bank is planning to expand the scope of cases to be referred to the OC beyond those under S4A as required currently,” said the central bank in a release.
The RBI has been working on a framework with regard to cases that may be determined for reference for resolution under the Insolvency Bankruptcy Code. The RBI has already sought information on the current status of the large stressed assets from the banks. The RBI said that it would also constitute a committee comprised mainly of its independent board members to advise it in this matter.
On the same lines, the current guidelines on restructuring are under examination for such modifications to resolve the large stressed assets in the banking system in a value-optimising manner. “The RBI envisages an important role for the credit rating agencies in the scheme of things and, with a view to preventing rating-shopping or any conflict of interest, is exploring the feasibility of rating assignments being determined by the Reserve Bank itself and paid for from a fund to be created out of contribution from the banks and the Reserve Bank,” said the central bank, adding that it would be holding meetings in the near future of all stakeholders such as ARCs, rating agencies, private equity firms etc.
The amendments to the BR Act 1949, introduced through the ordinance, and the notification issued thereafter by the central government empower RBI to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC). It also enables the Reserve Bank to issue directions with respect to stressed assets and specify one or more authorities or committees with such members as the bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.
Post the promulgation of the ordinance, the RBI issued directives changing the existing regulations on dealing with stressed assets such as reducing the consent required for approval of a proposal under joint lenders forum, clarifying that a corrective action plan could include flexible restructuring, SDR and S4A. With a view to facilitating decision making in the JLF, consent required for approval of a proposal was changed to 60 per cent by value instead of 75 per cent earlier.
Banks who were in the minority on the proposal approved by the JLF are required to either exit by complying with the substitution rules within the stipulated time or adhere to the decision of the JLF. Participating banks have been mandated to implement the decision of JLF without any additional conditionality. The boards of banks were advised to empower their executives to implement JLF decisions without further reference to them.
