RBI lets banks sell NPAs abroad as one-time settlement

In a move that could significantly raise India's external liability and build up risks to the external sector, the Reserve Bank of India (RBI) on Tuesday allowed domestic banks to directly sell their bad loans in manufacturing and infrastructure sectors to investors abroad as part of one-time settlement (OTS) exercise. 

The move will allow overseas investors to take direct loan exposure to Indian corporates.
Alternatively, the defaulters, or stressed borrowers, can sell their assets in accordance with the OTS scheme, in order to raise external commercial borrowing (ECB) from abroad to repay domestic loans, the RBI said in a statement.
Experts see this as one way of skirting the Insolvency and Bankruptcy Code (IBC). Banks and corporate borrowers can now easily get into a OTS scheme between themselves and raise funds abroad – either by the defaulter, or the banks.
At the same time, Indian corporates can raise long-term loans for working capital, ‘general corporate purposes’ and for repaying domestic rupee loans, the statement said.
Apart from easing the non-performing asset (NPA) pressure on domestic banks, the RBI’s move can allow companies to raise cheap, long-term loans easily now. Part or all of that can be used to retire domestic loans.
The RBI notification said corporate borrowers can avail of ECB “for repayment of rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector and classified as SMA-2 or NPA, under any one-time settlement arrangement with lenders”. SMA is special mention account, in which SMA-2 is the loan not serviced between 60 days and 90 days.
If the loan is not serviced on the 91st day, it becomes NPA.
“Lender banks are also permitted to sell, through assignment, such loans to eligible ECB lenders, except foreign branches/overseas subsidiaries of Indian banks, provided, the resultant external commercial borrowing complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB framework,” the notification said.
RBI after consultations with the government, also relaxed end-use stipulations under external commercial borrowings framework for corporates and NBFCs.
Accordingly, corporates can avail of external commercial borrowings for working capital requirements, general corporate purposes and repayment of rupee loans. Eligible borrowers will now be allowed to raise ECBs from recognised lenders, except foreign branches/ overseas subsidiaries of Indian banks.
ECBs with a minimum average maturity period of 10 years can be contracted for working capital purposes and general corporate purposes. Borrowing for on-lending by NBFCs for the above maturity and end-uses is also permitted.
ECBs with a minimum average maturity period of 7 years for repayment of Rupee loans availed domestically for capital expenditure. The borrowings for on-lending by NBFCs for the repayment of rupee loans would also be permitted. For repayment of rupee loans availed domestically for purposes other than capital expenditure and for on-lending by NBFCs for the same, the minimum average maturity period of the ECB would have to be 10 years.
It has further been decided to permit eligible corporate borrowers to avail ECB for repayment of Rupee loans availed domestically for capital expenditure in manufacturing and infrastructure sector and classified as SMA-2 or NPA, under any one-time settlement arrangement with lenders. Lender banks are also permitted to sell, through assignment, such loans to eligible ECB lenders, except foreign branches/ overseas subsidiaries of Indian banks, provided, the resultant external commercial borrowing complies with all-in-cost, minimum average maturity period and other relevant norms of the ECB framework.