New Delhi: The Reserve Bank of India (RBI) on Wednesday stoutly defended its revised framework on bad loans under which even a one-day default could lead to the account being classified as non-performing asset (NPA).
The RBI’s tough posture comes even as the finance ministry has been pitching for scrapping of this key norm. The RBI deputy governor raised concerns over the large number of borrowers failing on the one-day default norm, and asked the lenders to take this as a warning indicator warranting action.
“Data show that a large number of borrowers, even some highly-rated ones, have failed on the one-day default norm. This has to change. If borrowers fail to pay on the due date because of a cash flow problem, banks should see that as an early warning indicator warranting immediate action,” RBI deputy governor NS Vishwanathan said at the 14th convocation ceremony of the RBI-run National Institute of Bank Management, here on Wednesday.
The finance ministry has been pressing the Mint Road to relax the stringent new NPA reporting norms by relaxing the one-day default reporting norm to 30 days, as it worries that with the new norms, many more companies, especially small and medium units, will end up at NCLTs, crippling the economy. The deputy governor, who is in-charge of the banking regulations department, also said banks should warn their customers that one-day default will lead them to the watch list for resolution.
“Borrowers, too, should realise that they have to meet payment obligations and it is no more sufficient to pay up only by 60/90 days past due date,” Vishwanathan said.
Amidst rising bad loans, which have crossed 10 per cent of the system, RBI had on February 12 released a revised framework on bad loan resolution, under which banks will have to disclose defaults even if the interest repayment is overdue by just one day and have to keep a resolution plan in place within 180 days.
Failing to find a resolution within this stipulated time, the defaulting company will have to be referred to the insolvency courts as RBI had abolished all the extant debt resolution mechanisms.
Vishwanathan said if borrowers, with ability to pay on due date, delay routinely or because they see other arbitrage options, it must change. He said the revised framework tries to reduce the arbitrage options that borrowers are currently enjoying while raising funds through bank borrowing compared to raising funds from the market.
“If a borrower delays coupon/principal payment on a corporate bond even for a day, the market would penalise the borrower heavily -- the rating would be downgraded, the yields on the bonds would shoot up, cost of further financing would increase, suits would be filed by investors etc,” he said.
“So far, defaults in bank borrowings have not attracted similar reactions,” Vishwanathan rued and said only when the over-dues stretch beyond 90 days, the loans would be classified as non-performing assets, hence efforts by lenders and borrowers should be to avoid the account getting classified as an NPA.
“What this means is that debt contract embedded in bank loan has been continuously losing its sanctity, especially where the borrowing is large. There is a need to change this and restore the sanctity of the debt contract, lest the debt becomes subordinate even to equity,” he said.
Meanwhile, Vishwanathan also said RBI will put in place necessary evaluation standards for assessing the performance of rating agencies with a view to ensure greater credibility of the rating opinion. He said the process of recapitalisation of public sector banks will enhance their ability to provide for credit loss as well as to contribute to credit growth.
Vishwanathan said retail credit and the personal loan segment are not risk-free and banks should not see it as the grand panacea for their problem riddled corporate loan book.
