Good mix of disciplining and empowering banks
Given impaired assets for PSU banks rose from 6.8% of total loans in March 2009 to 12.1% in March 2013, RBI has done well to come out with a framework to slow the pace of future accretion of bad loans. The framework, out in the form of a discussion paper, will be formalised once comments come in from all stakeholders. Broadly, the framework is to encourage banks to come out with details of loans which are on the verge of going bad—obviously the chances of rescuing a loan are higher when it is detected earlier. So, as opposed to the 90-day rule after which loans not being serviced have to be reported, RBI is now proposing a 31-60 day category as well as a 61-90 day category of Special Mention Accounts. All such loans are to be reported to a Central Repository of Information on Large Credits (CRILC). While there are no incentives for banks to report such potentially troubled loans, there are serious penalties for non-reporting in that, were such loans to slip into NPAs, the provisioning on them rises dramatically, by more than double in some cases.
The suggestions become even more interesting after this, though some sops have been thrown in—if banks are to sell off their troubled assets as a loss, for instance, instead of recognising the loss immediately, this can be spread over a period of 8 quarters. There is then a massive increase in the power of banks to discipline errant borrowers. Though some part of this exists even today—such as the provision to transfer part of the borrowers’ equity to the banks or to put it in an escrow account to allow for change in management control—RBI is strengthening the provisions by, in some cases, codifying them. Wilful defaulters—and it is up to the banks to classify lenders in this fashion—will not be eligible for restructuring and, if an exception is to be made, each and every bank in the consortium has to approve this. Here’s the added twist: anyone who has been a director on a wilfully defaulting company gets blacklisted in a sense—so if this person is on the board of even a healthy company, banks will have to make extra provisions against loans to that healthy company. A centralised, and public list, will be available of such directors, making it difficult for banks to find ways to ignore this directive. Indeed, a new category is to be created of ‘non-cooperative’ borrowers who, for instance, play for time with banks, pretending they are on the verge of bringing in equity. As in the case of wilful defaulters, a list of directors on such companies will also be made public and higher provisioning will also have to be made against loans to companies which have these worthies on their boards. Loans turning bad is something that cannot always be avoided, and it is not always due to malfeasance on the bank or the promoters’ part, but RBI is trying to give banks a lot more powers—even make it mandatory—to be strict with defaulters and force them to sell assets to make good their loans from, if need be, across group companies. The paper will evoke lots of protest. RBI needs to hold its nerve.