Mumbai, Oct. 9: The Reserve Bank of India (RBI) today came out with a bad-loan busting framework that calls for an early-warning system and creation of special slot between standard and sub-standard types of assets.
The proposals are a sequel to a Board for Financial Supervision order on conducting a study to see just why non-performing assets deteriorate from sub-standard to doubtful, and suggest ways to prevent it. An RBI group completed the study that led to the framework.
According to the group, banks should identify weakness in the beginning — when a loan account starts showing first signs of weakness regardless of whether it is an NPA. At this stage, a techno-economic study can be carried out to gauge the chances of a turnaround. A restructuring, based on the assessment of viability, the promoter’s intention and his stake in a firm, can be attempted if banks are convinced of time-bound revival.
“If a bank/consortium decide that a unit is totally unviable, it is better to facilitate winding up/selling early to recover whatever is possible through legal means before the security pledged loses its worth,” RBI said.
The panel also said banks should wield powers vested in them by The Securitisation and Reconstruction of financial Assets and Enforcement of Security Interest Ordinance 2002 to facilitate foreclosures.
On early alerts, the RBI group said this should pick up the initial signals for accounts that show signs of weakness in a mechanism that can be an integral part of the risk-management process. Banks can set a time limit for accounts that are not serviced properly to improve, after which they should go for proactive intervention — well before an account turns into an NPA.
A loan, the group says, could be classified as a potential NPA even if it is repaid regularly. This should be done if there are delays in submission of stock statement/ other control statements/financial details, apart from the bouncing of cheques issued by borrowers.
“It is suggested that banks introduce a new asset category between standard and sub-standard for internal monitoring and follow up. An asset may be transferred to this category once the earliest signs of sickness/ irregularities are identified. This will help banks to focus on accounts with potential problems from the beginning and take remedial actions that are more effective. Once these accounts are categorised and reported in such a way, the top management should give it the attention it deserves,” the central bank averred.
Banks can consider a special investigative audit of all financial transactions/business transactions, books of accounts to ascertain factors that contribute to sickness.