Rating agencies may have to vet NPA resolution plan
ON CARDS More than one agency likely to work out the discount at which banks should restructure NPAs; RBI also looking to expand scope of oversight panel
The Reserve Bank of India (RBI) may introduce thirdparty assessments of bad loans — a move that could help accelerate resolution of the ₹7 lakh crore of sticky assets choking the country’s banking system.
If such a system is in place, more than one rating agency would work out the discount at which a bank should transfer or restructure a non-performing asset (NPA), encouraging bankers to arrive at a value without fear of their decision coming under the scanner in the future. Presently, bankers do not insist on rating agency assessments before deciding on what restructuring plan to implement.
NPAs are loans that do not yield returns.
The central bank is also looking at expanding the oversight committee mechanism to look at all bad-loan cases and not just those under the so-called scheme for sustainable structuring of stressed assets (S4A), RBI deputy governor SS. Mundra said on Thursday.
Under S4A, banks can break up debt into sustainable and unsustainable halves, allowing deep restructuring of the latter, while the former continues to be serviced.
“We need to provide more strength to processes. Discussions are going on to see whether the institution of oversight committee can be enlarged or strengthened for JLF (joint lenders’ forum) mechanism,” Mundra told reporters on the sidelines of a Bandhan Bank branch opening.
Under S4A, banks had been asked to constitute an oversight committee which would assess a restructuring plan to attest that all processes had been followed before its implementation. This, along with rating agency approval, can help shield bankers from any future investigations.
“Expanding the area of functioning of the oversight committee seems like a good idea. The burden of establishing value will no longer be with the bankers alone,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP. “The only problem is that an oversight committee might get flooded if we push every single account to them. There should be a certain threshold after which the committee steps in.”
The Indian banking system is laden with ₹7 lakh crore of bad loans. Resolution of the loans has proved elusive partly because bankers are concerned that investigative agencies will question them if they offer large discounts on these loans.
In a speech on February 21, RBI deputy governor Viral Acharya proposed having two rating agencies vet a bad-loan resolution plan, so that the sustainability of the plan is established. Acharya had also proposed setting up two asset management companies, one led by the private sector and one by the government, to deal with stressed assets that could be turned around immediately and those that may take time, respectively.
“Ingredients required are that bankers should come together, decide very quickly and the resultant valuation that happens is transparent. If the valuation is happening with a haircut then it should entail higher capital requirements. That is where the discussions are moving,” Mundra said.
The regulator has been experimenting with various bad loan management schemes, including S4A, over the last three years to ease the stress on banks’ books. These haven’t yet had a significant impact. Yes. If you put pieces of what we have been talking about together, we will be playing at two ends. One end, we hope, will become mass market once the floodgates open.
THE RBI HAS BEEN EXPERIMENTING WITH VARIOUS BAD LOAN MANAGEMENT SCHEMES OVER THE LAST THREE YEARS TO EASE STRESS ON BANKS’ BOOKS
I don’t think so. Subsidy also becomes a drain on the exchequer. Subsidy has to be such that it makes the offering viable for consumers. Consumers will not buy just because it is an electric vehicle. They will buy because it