RBI proposes hike in borrowing cost for willful defaulters

The Reserve Bank of India has proposed a host of measures, including higher borrowing costs for wilful defaulters as well as joint lenders forum and formation of a central repository on large credits, in a bid to contain the rising non-performing assets (NPAs) of banks and boost recovery efforts.

In a discussion paper on early recognition of stressed financial assets of banks and steps to be taken for their early recovery, RBI has proposed incentives to banks to collectively plan a better regulation of stressed assets for working out a resolution plan, and increased provisioning in case of failure to reach an agreement.

The discussion paper, 'Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy,' outlines a corrective action plan that will incentivise early identification of problem cases, timely restructuring of accounts which are considered to be viable, and taking prompt steps by banks for recovery or sale of unviable accounts.

Under the proposed framework, banks will be required to make higher provisioning in respect of fresh loans to non-cooperative borrowers as also new loans to any other company promoted by such promoters or directors.

The provisioning applicable in such cases will be at the rate of 5 per cent if it is a standard account and accelerated provisioning up to 100 per cent if it is an NPA.

Banks in India reported a spike in bad loans to around Rs100,000 crore in the last one year.

If the NPAs and restructured loans are added to this, the ratio of distressed assets of banks will be close to 10 per cent of their total loans, or around Rs5,50,000 crore, as per the RBI figures.

The RBI will set up a Central Repository of Information on Large Credits (CRILC) to collect, store, and disseminate credit data to lenders.

Banks and non-banking financial companies will have to furnish credit information to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs5 crore and above.

An account with overdues of between 61 and 90 days by one or more lending banks and NBFCs will trigger the mandatory formation of a joint lenders' forum and formulation of corrective action plan.

''Banks must put in place a proper management information and reporting system so that any account having principal or interest overdue for more than 60 days gets reported on the 61st day itself,'' the paper said.

RBI, however, said takeout financing / refinancing should be possible over a longer period and will not be construed as restructuring.

The main proposals in the discussion include:

  • Early formation of a lenders' committee with timelines to agree to a plan for resolution;
  • Incentives for lenders to agree collectively and quickly to a plan – better regulatory treatment of stressed assets if a resolution plan is underway and accelerated provisioning if no agreement can be reached;
  • Improvement in current restructuring process: Independent evaluation of large value restructurings mandated, with a focus on viable plans and a fair sharing of losses (and future possible upside) between promoters and creditors;
  • More expensive future borrowing for borrowers who do not co-operate with lenders in resolution.
  • More liberal regulatory treatment of asset sales:
  • Lender can spread loss on sale over two years provided loss is fully disclosed'
  • Takeout financing/refinancing possible over a longer period and will not be construed as restructuring;
  • Leveraged buyouts will be allowed for specialised entities for acquisition of 'stressed companies';
  • Steps to enable better functioning of asset reconstruction companies; and
  • Encouraging sector-specific companies/private equity firms to play active role in stressed assets market.

RBI's move comes in the wake of a significant increase in non-performing assets of banks, especially since the global depression that started in 2008 and the subsequent financial incentives provided by the government to lessen the impact of the global financial market crisis.