The Reserve Bank of India’s (RBI’s) revised framework for the resolution of large stressed assets has thepotential to herald a big change in the approach of banks to monitoring of exposures and resolution of nonperformingassets (NPAs), and thereby strengthen the banking system.
The upshot of the strong statement of intent by the RBI late on Monday will be structural streamlining,standardising and harmonising of the resolution process (by doing away with the plethora of previousframeworks) leading to greater transparency, credibility and efficiency.
By mandating weekly information on large delinquent accounts, by directing that a resolution plan be scriptedimmediately after default, and by setting stringent timeliness (180 days from default) for referring an account tothe Insolvency and Bankruptcy Code process, the RBI is establishing an ecosystem where NPAs would getrecognised on time and their resolutions are structurally quicker than before.
Says Krishnan Sitaraman, Senior Director, CRISIL Ratings: “The revised RBI framework sets in motion achange in the paradigm of stressed assets resolution. The streamlining of the NPA resolution processaffords simplicity, timeliness and credibility, so is a long-term positive for the banking sector.”
Further, independent credit evaluation of the residual debt in resolution plans, and minimum investment graderating for any upgrade of NPA cases, will improve investor and other stakeholder confidence over the longterm.
In recent years, several steps such as Corporate Debt Restructuring, the Strategic Debt Restructuring scheme,and the Scheme for Sustainable Structuring of Stressed Assets were conceived to resolve the stressed assetssituation but to limited success.
The RBI move has come at the right hour because CRISIL believes that the asset quality pressures are neartheir peak (refer to CRISIL release on September 24, 2017, titled ‘Stressed assets unlikely to see big increase here on’) and it will improve the ability of banks to transit to the new regime.
The stock of gross NPAs in the banking system is seen rising to Rs 9.5 lakh crore by the end of this fiscal.NPAs started rising fast since fiscal 2015, and trebled from Rs 3.2 lakh crore seen then, after the RBI pushedbanks to recognise NPAs on time rather than kick the can down the road.