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Supreme Court strikes down RBI's Feb 12 circular; what should banks do?

The circular had mandated that banks take into consideration all stressed companies with loan exposure above Rs 2000 crore even if they defaulted by a single day.

twitter-logo Anand Adhikari        Last Updated: April 4, 2019  | 15:50 IST
Supreme Court strikes down RBI's Feb 12 circular; what should banks do?

The Supreme Court has struck down Reserve Bank of India's circular dated February 12, 2018, on resolution of stressed assets. The circular had mandated that banks take into consideration all stressed companies with loan exposure above Rs 2000 crore even if they defaulted by a single day. The banks were given six months after the one-day default to devise a timely restructuring plan and, if nothing happened within that timeframe, the eventual solution was to file for insolvency under the Insolvency and Bankruptcy Code (IBC). The power, shipping and sugar companies had challenged the circular in the Court. With the Supreme Court quashing the RBI's circular, there is chaos. What will the banks do now?

  • Treat stressed accounts on priority

        The bankers are always aware of the 'stress' in a particular sector or a company. The RBI or the government should not handhold them.  Banks dodge acting against potential defaulters even after the 90-day default period ends. They are often shy of naming and shaming them or taking them to recovery tribunal.  It is high time banks coordinate better among themselves and act in unison to decide the future of stressed accounts.

  • Prudence in provisions

        Nothing stops bankers to make higher provisions for stressed accounts. Many times banks hide the stress to show better profits. The recent divergence in the NPA (non-performing asset) data between what banks reported and what RBI estimated clearly shows how reluctantly banks approach a stressed account. They should be prudent and cautious in providing for stressed accounts, which could turn into NPAs. If stressed accounts do not turn into an NPA, the provisions can always be written back to profits.

  • 'Project Sashakt' for resolution

        Banks already have a 'Project Sashakt' to deal with stressed assets above Rs 500 crore with the help of AMCs (asset management companies) and AIFs (alternate investment funds). Banks are already in the process of setting up an AMC, which will have different sectors under it. Funds will come from AIFs. Banks or the Indian Banks Association (IBA) should aggressively create a vibrant AMC/AIF model.  

  • Banks should act like investment bankers

        Banks should act like investment bankers to find out suitors for stressed businesses. They should engage with investment bankers both in India and abroad to get interested parties on board. If more suitors join the fray, the possibility of getting a good price enhances.  

  • Stricter credit assessment

        Finally, banks should follow stricter credit assessment rules to avoid a difficult situation. Private banks like HDFC Bank have followed a cautious approach in lending to companies belonging to crisis-ridden sectors. Public sector banks should re-work on their risk models to price the loans appropriately.

Also read: Supreme Court sets aside RBI's February 12 circular on bad loans, calls it 'unconstitutional'

Also read: Congress promises to introduce simpler taxation system with 'GST 2.0' in poll manifesto

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