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India's central bank tightens rules on handling bad loans

15 February 2018

Further, RBI has also tightened the criterion for up-gradation of NPA accounts or accounts which gets classified as NPAs upon restructuring under the resolution plan approved by JLF.

Rajeev Kumar, the top government bureaucrat overseeing the banking sector, said the new rules will impact 2-3 percent of banks' loan books, while provisions could rise a "little", financial news service NewsRise reported. "Government is determined to clean up things in one go and not defer it. Resolution now will happen within a timeframe", he told PTI.

Officials said the Reserve Bank of India (RBI) would be approaching its counterpart Hong Kong Monetary Authority (HKMA) to gather more details in the PNB matter. "Lenders shall continue to pursue such cases as per the earlier instructions", the RBI said.

Banks are set to report a fresh spike in bad loan numbers in the coming quarters on account of new RBI norms that require lenders to classify loans henceforth restructured as non-performing assets (NPAs). The new rules will subsume existing stressed asset schemes including Strategic Debt Restructuring Scheme (SDR) and the Scheme for Sustainable Structuring of Stressed Assets (S4A) and gives importance to the Insolvency and Bankruptcy Code.

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Among other things, the RBI has made a decision to do away with the Joint Lenders' Forum (JLF) as an institutional mechanism for resolution of stressed accounts also stands discontinued. RBI has also set a 180 day timeline for all the banks from the date of first such default to restructure the defaulted loans.

He also said that higher provisions for accounts referred under the Insol-vency and Bankruptcy Code (IBC) and fresh slippages also contributed for their dismal performance during the last quarter.

Indeed, the new rules would bring discipline to the banking sector, although provisioning costs will shoot up as more borrowers are taken to court, said R. Subramaniakumar, chief executive at Indian Overseas Bank, a state-run lender with the second-highest bad loan ratio among all banks.

As per the revised guidelines, the banks will be required to identify incipient stress in loan accounts, immediately on default, by classifying stressed assets as special mention accounts (SMAs) depending upon the period of default. A non-performing asset is a loan for which the principal or interest payment has not been paid for 90 days or more.

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It has also warned of strict action if the timelines are not followed by lenders. This reporting will have to be monthly effective April 1, 2018. This information will then have to be reported by lenders to the Central Repository of Information on Large Credits (CRILC) on all borrower entities having aggregate exposure of Rs 5 crore and above with them.

The revised RBI guidelines on resolution of stressed assets entail proactive resolution of the stressed assets whereby the lenders need to finalise the resolution plans as the accounts slips into SMA category.

Under the new rules, banks will have to file for insolvency proceedings against loan defaulters with 20 billion rupees ($311 million) or more if a resolution plan is not implemented within 180 days of the initial occurrence of default, the RBI said.

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India's central bank tightens rules on handling bad loans