RBI outlines action plan to tackle NPAs; discussion paper open for public comments

December 19, 2013

The Reserve Bank of India (RBI) outlined a corrective action plan to minimize rising Non-performing assets (NPAs). The plan include three steps:-

To motivate early identification of problem cases.
To restructure the accounts timely , which are considered to be viable, and
Banks must take prompt actions for recovery or sale of unviable accounts.

As per the RBI discussion paper, “Early recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy”, which is open for public comments till January 1, 2014, it would set up a Central Repository of Information on Large Credits (CRILC) to collect, store, and disseminate credit data to lenders. The credit information will include all types of exposures as defined under RBI Circular on exposure norms, and will also include data on lenders’ investments in bonds/debentures issued by the borrower/obligor.
Banks will have to furnish credit information to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs.5 crore and above .
On the asset sales front, the RBI has shown readiness in allowing a lender to spread any loss over two years provided the loss is fully disclosed and allowing leverage buyouts by specialized entities. It also suggests takeout financing/refinancing possible over a longer period and not construing it as restructuring. RBI also proposed more expensive future borrowings for borrowers who do not cooperate with lenders in resolution.

What are Non performing Assets (NPA)?

Any asset, including a leasePDFd asset, becomes a non performing when it ceases to generate income for the bank are called Non Performing Assets or Bad loans.
Note: RBI proposed these rules to help banks to recover bad debts in an effort to ease the financial stress on banks as the economy slows. This discussion comes as there is fear of bad loans to gain a record high of around Rs. 2.9 trillion by the end of the fiscal or 4.5 per cent of the total banking assets.