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Why the RBI's circular on bad loans is a good one!

Why the RBI's circular on bad loans is a good one!

Why the RBI's circular on bad loans is a good one!
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By Latha Venkatesh  Apr 11, 2018 7:31:14 PM IST (Updated)

The new rules are bound to increase the amount of NPAs.

On Tuesday,  Rajya Sabha standing committee on subordinate legislation met RBI officials and bankers to take stock, among other things of the RBI's new rules for resolution of stressed loans and NPAs(non performing assets).

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Yes, the RBI's new rules are strict. According to it, if loans over Rs 2,000 crore remain unpaid, banks must resolve the stress in six months or take the borrower to the bankruptcy court to find buyers at some price.
One can understand why members of parliament are worried. Many loans and companies could go under the hammer and hence, summoned bankers and RBI to the table.
Business-Politics nexus ?
But what arouses one's suspicions is that previous meetings of this committee were attended by a businessman turned politician whose group's loans are NPAs with most banks. The businessman is a Rajya Sabha member, but not a member of this committee (thank god).
Why is the promoter of a group that owes the banking system over Rs 40,000 crore, being allowed to hobnob with a committee that is later questioning the banking regulator?  It's a shame there are no laws that bar a defaulter from becoming a parliamentarian. But allowing a defaulting parliamentarian to sit in the meetings of a committee that is supposed to question the country's loan default rules is the ultimate conflict of interest.
It shows how deep the business-politics nexus runs  and how much this nexus may be responsible for the mess our banks are in.
Which brings one to the RBI's new NPA rules again. The key elements of these rules are as follows:
  1. Under the new rules as soon as a borrower defaults to any bank, all banks must come together to resolve the default – either by recovering dues, ensuring a change in promoter, sell-down of the exposure to or through a restructuring scheme. The new loan must get an investment grade rating from one to two external credit rating agencies.
  2. Failure to put in place a plan within six months will result in referral to the National Company Law Tribunal (NCLT) for insolvency proceedings.
  3. If restructured, the loan will attract provisioning just like an NPA.
  4. Upgrading the account will be allowed only if interest is paid regularly and 20% of the principal is paid back.
  5. The new rules are bound to increase the amount of NPAs, because the moment a loan remains unpaid banks have to either restructure and make provisions or take the borrower to the NCLT. May be there is a case for a few tweaks. The banks can wait for a month after the overdue date before moving against the borrower. May be banks can be empowered to force a resolution even if all lenders don’t agree but a majority do.
    But these tweaks apart, it is necessary for the RBI to ensure that the main thrust of its new circular is not diluted.
    First, it must not weaken on its resolve to push large loans (over Rs 2000 crore) to  the NCLT, if not resolved. This is morally and legally necessary. Having first pushed 12 of the largest cases to the NCLT, and then the next 30 large loans, it becomes incumbent upon the RBI to give the same treatment to the next set of large loans. Else it can be dragged to the courts for discrimination.
    Secondly, these loans have been kicked down long enough and the excuse that banks should focus on restructuring because national wealth is involved doesn't hold anymore. Enough opportunity and time has already been given.
    Two Big Worries
    That said there are two big worries, which the government and not the RBI needs to worry about. As more and more cases come to the NCLT, will this system have the bandwidth to handle and dispose cases within the legally allotted time table? The higher judiciary needs to ensure that it doesn't  grant stays or in any other way delay the NCLT process. The government needs to ensure that the strength of the NCLT benches are sufficiently refurbished as the load increases.
    The second worry for the government will be the power projects that will inevitably come to these courts. About 30 large projects totalling loans worth 1.7 lakh crore are almost certain to come to the NCLT. At least two thirds of these projects have no power purchase agreement or no coal agreement  or neither. Which means these plants will not find buyers even in the NCLT and may actually go into liquidation. That would be a national waste. It is incumbent that the government wake up to the formidable size of the problem of stressed power projects.
    It will be very tempting for the government to dodge this massive bad loan problem in power sector by forcing the RBI to once again kick the can. That is precisely what we must guard against. Debt problems get immensely bigger with time. Indian banks already have too large a bad loan load. More power to the central bank to resist the  inevitable pressures.
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