Moneycontrol decodes the new set of rules in this report. Our maiden edition of “Macro@Moneycontrol” delves into why RBI’s new norms are crucial to tackle the menace of bad loans.
The Reserve Bank of India recently overhauled the rules on bank loan defaults; scrapping outdated loan-restructuring mechanisms to push big defaulters to insolvency processes. The aim was to simplify the framework for resolution of stressed assets and help banks reduce the bad loans on their books.
Moneycontrol decodes the new set of rules in this report. Our maiden edition of “Macro@Moneycontrol” delves into why RBI’s new norms are crucial to tackle the menace of bad loans. Many of the loan restructuring mechanisms were criticized as they helped banks evergreen their bad loans.
Total bad loans or gross non-performing assets (NPAs) in the banking system are estimated at over Rs 8.5 lakh crore. The RBI has now asked banks to submit data on such loans every month, against a quarterly reporting mechanism earlier.
Such measures, in effect, make banks more accountable to track bad loans almost every day. The new framework creates a uniform plank for banks to be judged upon and also clarifies the rules to be followed when a loan turns bad.
Following the Rs 12,700-crore fraud at Punjab National Bank involving jewellers Nirav Modi group and Gitanjali Gems, the Finance Ministry too has sprung into action. On February 27, the ministry directed managing directors of public sector banks to examine all non-performing assets (NPAs) or bad loans over Rs 50 crore for possible fraud and refer them to the Central Bureau of Investigation (CBI).
Timelines for large accounts to be referred under IBC
For loan accounts of Rs 2,000 crore or more, banks will have to ensure that a resolution plan is in place within 180 days after a ‘default’.
If not implemented within the timeframe, the account must be referred to the insolvency courts within 15 days.
For accounts with exposure of Rs 100 crore to Rs 2,000 crore a timeline for resolution will be announced over a two-year period.
Existing accounts under Insolvency and Bankruptcy Code
Last year in two tranches, RBI identified around 40 NPA accounts to be taken to courts under the Insolvency and Bankruptcy Code.
In June 2017, RBI identified 12 large accounts, with 25 percent share of total bad loans.
In August 2017, RBI identified 28 large and mid-sized loan accounts.
Watch Moneycontrol Economy Editor Gaurav Choudhury decode the new NPA norms in the accompanying video.
