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RBI weighs steps for early detection of bad loans

Mumbai, Dec. 17: The Reserve Bank of India (RBI) today unveiled its guidelines for an early warning system that would red flag incipient signs of bad loans in the banking system.

The system, which breaks down the warning signs into three coded categories, is designed to ensure that the banking system recognises financial distress early, takes prompt steps to resolve it, and ensures fair recovery for lenders and investors.

The norms, which were outlined in a discussion paper, provide for a corrective action plan that will incentivise early identification of problem cases, ensure timely restructuring of accounts which are considered to be viable, and taking prompt steps by banks for recovery or sale of unviable accounts.

More importantly, it will penalise lenders through higher provisioning if the lenders cannot agree among themselves on a way to resolve a situation where a particular asset is at risk of turning into a bad loan.

The norms also make future borrowings difficult for those borrowers who do not co-operate with lenders in resolution.

The guidelines come at a time mounting bad loans, particularly among the public sector banks, have exacerbated worries at the central bank and the finance ministry.

According to a note from Angel Broking, during the second quarter of this year, the aggregate gross bad loans of listed PSU banks rose nearly 17 per cent on a sequential basis to Rs 129,533 crore.

Upon assuming charge as the RBI governor in September, Raghuram Rajan had said the apex bank would come out with norms that would focus on early identification of bad loans and their timely resolution. As part of this effort, the RBI has already announced the creation of a Central Repository of Information on Large Credits (CRILC) that will collect, store, and disseminate credit data to lenders.

Banks and systemically important non-banking financial companies (NBFC-SI) will have to furnish credit information to CRILC on all their borrowers having an aggregate fund-based and non-fund based exposure of Rs 5 crore and above.

The RBI today proposed that before a loan account turns into an NPA, banks should identify incipient stress in the account by creating a new sub-asset category called Special Mention Accounts (SMAs). It suggested the creation of three such categories.

Banks will be required to report the SMA status of a borrower to the CRILC. The RBI recommended that reporting of an account as SMA-2 by one or more lending banks/NBFC-SIs would trigger the mandatory formation of a joint lenders’ forum (JLF) and formulation of a corrective action plan (CAP) for early resolution of stress in the account.

To resolve such cases quickly, the discussion paper said that if lenders failed to agree upon a common CAP within the stipulated timeframe, they would be subject to higher provisions.

The most noteworthy changes are in the sub-standard category that covers loans that have remained as NPAs for a period of less than or equal to 12 months. In the case of unsecured bad loans, when the non-performing account remains as an NPA for 6 months to 1 year, the provision will double to 50 per cent from 25 per cent at present in the case of non-infrastructure loans.

For secured loans, the provision will jump to 30 per cent from the existing 15 per cent if the sub-standard asset remains an NPA for a period of 6 months to one year.

Both the JLF and the CAP will come into play if an account is reported as an SMA-NF for three quarters during a year to date or SMA-1 for any two quarters during a year to date or an account is SMA-2 at any time.

Two options have been proposed under CAP that include rectification of the problem wherein the lenders could obtain a specific commitment from the borrower to regularise the account so that it comes out of SMA status or does not slip into the NPA category.

The second option is that of restructuring if lenders feel that the account is viable and the borrower is not a wilful defaulter.

The guidelines stipulated that the JLF should arrive at an agreement on the option to be adopted for CAP within 30 days from the date of an account being reported as SMA-2. If the account is to be restructured, it will be referred to the corporate debt restructuring (CDR) cell. The cell will have to take a decision on such cases within 30 days as against the current time limit of 90 to 180 days.

The discussion paper also tried to encourage the sale of a stressed asset to asset reconstruction companies (ARCs). The RBI said that if the sale value was lower than the net book value of the asset, the bank could spread the shortfall for a period of two years. However, this relaxation will only be available till 2015.


Criteria for Special Mention Accounts. Such accounts are not NPAs but show signs of stress

Financial signs of stress

Principal or interest payment due for 31-60 days

Principal or interest payment due for 61-90 days

Non-financial signs of stress

Delay of 90 days or more in submission of various statements to bank such as stock statement, financial statement

Actual sales /operating profit less than projection made to banks by 40%

Preventing banks to do stock audits

Reduction of drawing power by 20% or more after a stock audit

Evidence of diversion of funds for unapproved purpose

Drop in internal risk rating by 20% or more in a single review

Return of 3 or more cheques issued by borrowers in 30 days on grounds of non-availability of balance

Devolvement of deferred payment guarantee instalments or letter of credit or invocation of bank guarantee and its non-payment within 15 days

Third request for extension of time either for creation or perfection of securities as against time specified in original sanction terms

Rise in frequency of overdrafts in current accounts

The borrower reporting stress in business and financials


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