With no successful resolutions taking place, the central bank is planning for an orderly resolution of bad assets
Without giving details of the asset quality review (AQR) of banks that came to an end on March 31, 2017, Reserve Bank of India is set to embark on a new path for resolving the issue of non-performing large-ticket corporate loans.
With no successful resolutions taking place, the central bank is planning for an orderly resolution of bad assets.
While RBI governor Urjit Patel debunked the practice of farm loan waivers saying it distorts the credit discipline, he was silent on the credit discipline that the large corporate borrowers need to maintain.
Large companies which are defaulting to banks or have difficulties in servicing their loans can now breathe easy. The central bank has already set up an enforcement department that will closely look at resolving the bank loans to stressed companies.
With the gross NPAs expected to touch Rs 9 lakh crore, bankers have been asking for more relaxed norms for restructuring the corporate loans which will encompass deep restructuring that includes interest waivers, refinancing and a longer repayment period. There will be a number of oversight committees of external members who will oversee the restructuring.
"RBI has been aggressively preparing for an orderly resolution of the stressed balance sheets of banks, starting with the weakest ones," said the governor.
"The next steps in NPA resolution includes oversight from Promoted Corrective Action (PCA) and a new enforcement department that has begun operations this week," Patel said.
However, on farm loan waivers, Patel did some hard talk: "Economically speaking, the practice of farm waivers undermines an honest credit culture, impacts credit discipline, plugs incentives for future borrowers to repay, and ultimately transfers the responsibility to pay from borrowers to taxpayers."
"I think we need to create a consensus so that loan waiver promises are eschewed, otherwise the sub-sovereign fiscal challenges could eventually affect the national balance sheet," he said.
Terming the continuing strain of bank losses as "costly for the economy," he said the measures RBI will announce soon on big-ticket loans along with institutional strengthening "will engender confidence in the banking system, restore corporate demand and put the country back on the path of healthy bank credit".
"An important, perhaps the most important, prerequisite for efficient policy transmission is a well-capitalised banking sector that is able and willing to provide credit at reasonable terms to productive parts of the economy. Capital can come from the market or principal owner of PSU banks, which is the government. Having completed asset quality review (AQR) of banks, with several other critical ingredients in place, RBI has been preparing actively for next steps in orderly resolution of banks' stressed assets," said Patel.
Ravindra Prabhakar Marathe, CEO and MD, Bank of Maharashtra, said, "RBI is looking at measures to resolve the problems of big-ticket NPAs. With the balance-sheet cleaning exercise nearly over through AQR, RBI is going ahead with the Prompt Corrective Action (PCA) framework for weak banks. This action on the part of RBI coupled with turnaround plans being prepared by banks which received government capital in the last tranche will see increased activities in banks' headquarters."
Chanda Kochhar, MD and CEO, ICICI Bank, said the focus on the resolution of stressed assets would help in renewing confidence and boosting investment and aggregate demand going forward.
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