What stakeholders are saying about RBI's new framework to deal with stressed assets

The bouquets and brickbats and reservations continue to fly thick after the Reserve Bank of India's surprise announcement of a new framework to deal with stressed assets earlier this week.

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.

Under the new rules, insolvency proceedings would have to be initiated in case of a loan of Rs 2,000 crore or more if a resolution plan is not implemented within 180 days of the default and banks will face penalties in case of failure to comply with the guidelines.

Significantly, the RBI has also asked lenders to weekly report credit information, including classification of an account as special mention account (SMA) to the Central Repository of Information on Large Credits (CRILC) on all borrowers having an aggregate exposure of Rs 5 crore and above. The first such report is to be submitted for the week ending February 23, 2018.

"By mandating weekly information on large delinquent accounts, by directing that a resolution plan be scripted immediately after default, and by setting stringent timelines for referring an account to the Insolvency and Bankruptcy Code process, the RBI is establishing an ecosystem where NPAs would get recognised on time and their resolutions are structurally quicker than before," Krishnan Sitaraman, a senior director at Crisil, said in a report yesterday.

"The streamlining of the NPA resolution process affords simplicity, timeliness and credibility, and is long- term positive for the banking sector," the report added.

On the other hand, as ICICIDirect has pointed out in a note, "Overall, this framework is negative from a banking sector earnings perspective in the near to medium term (as provisions surge). Rise in bond yields along with higher provisioning will keep earnings muted, especially for PSU banks."

In a similar vein, a Credit Suisse report said that "Another Rs 1.5 trillion of non-performing assets are now likely to be with the National Company Law Tribunal in the next six months." It further warned that "NPA slippages are likely to accelerate, upgrades are likely to be more difficult and provisioning needs are likely to rise as more cases are referred under the IBC".

Rating agency ICRA, Moody's Indian affiliate, has warned that the new framework would take the overall NPAs at the system level to over 16.5% from the projected 10% by March. In other words, things are likely to get a lot worse before they get better. But given that India already ranks fifth on the list of countries with the highest NPAs, as per CARE Ratings, it's a timely move.

In reaction to the RBI crackdown, the Nifty Bank index, a barometer for bank stocks, declined 2% between Monday and Wednesday to 25,258.05-the Nifty PSU Bank index cracked 5%--but has recovered some ground this morning.

A major concern is that the more stringent provisioning requirements under the new framework will erode banks' profitability.

"As per banks studied by CARE Ratings, the standard restructured accounts stood in the range of Rs 1.8-1.9 lakh crore as on March 31, 2017 and the incremental provisioning requirement for banks would be in the range of Rs 40,000-50,000 crore for FY19 given that such accounts will need to be resolved in a time bound manner, failing which they will be resolved through the IBC route, resulting in enhanced provisioning for such exposures," the agency said in a note.

So the Rs 2.1 trillion in government recapitalization money will most likely go the way of provisions, which translates to curtailed loan growth. As per latest available CEIC data, India's Domestic Credit increased 5.9% year-on-year in November 2017-a record low-compared with the all-time high of 27.1% in July 2009.

But Axis Bank, for one, does not think that higher provisioning will be an issue in the coming days. The bank's CEO Shikha Sharma claims that they had already factored in higher bad assets recognition and the resultant provisions due to migration to the IndAS, the newer accounting system due from April 1 and, therefore, it will be able to support credit growth even after setting aside more money. Then again, Axis Bank-the country's third largest private sector lender-recently raised over Rs 10,000 crore in core equity from Bain Capital and others, and not every bank has such a buffer in place.

When asked if she was surprised by the RBI move late Monday, Sharma admitted that she was not expecting it but added that the RBI might have done it because of the failure of the existing dispensations like asset restructuring in resolving the underlying stress.

"They [RBI] probably feel that you have given dispensations and if those have not achieved the purpose, then let's move to a simple regime...they have tightened the regulation on the belief that early recognition and early action is probably in the best interest of banks and the underlined assets," she said, adding this is good in the long-term for the system.

With agency inputs