Finance ministry says right process will validate the legitimacy of bank's losses while resolving NPAs; Oversight committee to advise whether action taken is in accordance with RBI provisions
Clearing doubts on provisions of the new NPA ordinance, the Union finance ministry has said banks can "commercially decide" the level of losses, or haircut ( concession on interest rate, principal and collateral value of defaulter's assets).
"Taking a haircut is a commercial decision," a senior finance ministry official said responding to DNA Money's query on the issue.
"Right process will validate the legitimacy of the haircut. The oversight committee will advise whether the steps taken by banks on NPA are according to RBI provisions or not," the official said.
RBI will allow banks to accept haircut-- losses in the collateral value of loan defaulters including low interest rate and principal -- to speeds up the recovering process of more than Rs 8 lakh crore non-performing loans.
The official said the JLF (Joint Lender's Forum) was been working effectively in dealing with bad loans.
Now consent of only 60% of lenders in the JLF would be required against the earlier 75% for action against the borrower.
At any point in time, RBI can issue more guidelines to make NPA resolution process more effective.
Banks are set to implement Ind-AS, a new accounting standard from April 2018, where capital requirement would be based on Expected Credit Loss model.
Former ICAI chairman Amarjeet Chopra said, "I sincerely hope that it does not prove to be a scheme to provide haircut in respect of various loans to various borrowers who have defaulted wilfully.?"
The finance ministry indicated that it is ready to respond to recapitalisation challenge. "Austerity and NPA resolution are a precondition for recapitalisation. The effectiveness of the NPA resolution ordinance depends upon implementation," the official said.
The bank NPA ordinance was promulgated last week empowering RBI to take more action to resolve bad loans. Newly inserted Clause 35AA allows the RBI to direct banks to send cases to the NCLT (the National Company Law Tribunal) under the Insolvency and Bankruptcy Code 2016. The government has hinted that 50 largest defaulters' cases may be forced to be resolved within the December 31, 2017, deadline, else they will automatically be referred to the insolvency process.
WHAT IS A HAIRCUT?
In financial parlance, a haircut means a loss in the value of an asset, stated in percentage terms. For example, if an asset –such as holdings of a particular collateral value of property– is worth Rs 1 crore but is given a haircut of 30%, it means it is treated as though it has a value of 70 lakh. Banks assure that the loan will be paid back and they enter in agreement with the borrower and hold some collateral against the loan. If the borrower default and failed to repay the loan, the bank will sell the collateral at a price that will cover the amount of the loan. But assets value is not fixed, and if the price of assets plunges then haircut will be provided sell opportunity of such assets.
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