‘RBI’s one-day default norm draconian’

Government think tank NITI Aayog termed as ‘draconian’ the Reserve Bank of India’s (RBI) recent norms for stressed asset resolution.

In particular, it referred to the norm that mandated banks to start a resolution plan even if there was a default of only one day.

“On the RBI regulation, I personally think that the one-day limit was just not right,” said NITI Aayog Vice Chairman Rajiv Kumar. “I think, it should be longer and especially for [the] SMEs... it is draconian.”

There had been pressure on the central bank to relax the norms with Indian Banks’ Association making representation to the RBI and a few large banks lobbying with the Finance Ministry to convince the banking regulator. The RBI, however, dismissed such apprehensions stating the new rules would improve credit culture.

“Some concerns have been expressed that the one-day default clause is onerous. These concerns are not well founded. Let me tell you why. For cash credit account, the 30-day trigger has been retained. For term loans, where the repayment schedules are predetermined, borrowers need to and indeed have enough notice to arrange funds in time. It is a behaviour change in repayment of credit that has to come about,” RBI Deputy Governor N.S. Vishwanathan said.

Bankruptcy cases

On the 180-day resolution mechanism for bankruptcy cases, Mr. Kumar said six months was a long time. “Six months is a fairly long time. Our entrepreneurs must recognise they have to take charge of both the upside and the downside. It cannot be that the banks have all the downside.”

He also said there will be rationaisation and consolidation among public sector banks.

“On the financial sector I think more needs to be done and more is being done... there will be rationalisation and consolidation in public sector banking space.”