‘New RBI norms to spur surge in NPAs’

‘New RBI norms to spur surge in NPAs’

Context:

• Early identification of stress and resolution will prevent future ever-greening, says Moody’s unit ICRA

Reserve Bank of India’s new norms:

• The Reserve Bank of India’s new norms directing banks to start insolvency proceedings on accounts, if stress is not resolved in 180 days, could result in a jump in bad loans, according to Moody’s unit ICRA.
• The revised framework on resolution of stressed assets issued by RBI is likely to increase the reported non-performing asset (NPA) levels of the banks in coming quarters,” ICRA said.
• The RBI said that for accounts where a bank’s exposure exceeds ₹2,000 crore, a resolution plan must be implemented within 180 days from the date of first default.
• In case a resolution is not implemented, lenders should file an insolvency petition within 15 days of the expiry of the 180 days.
• The RBI had sent two lists of firms against which insolvency proceedings could be taken at the National Company Law Tribunal.
• Banks have to make a 50% provision in respect of accounts that are subject to insolvency proceedings.
•   In comparison, the provisioning norm for sub-standard assets is 15-20%.

Proactive resolution:

• The RBI norms, announced entail proactive resolution of stressed assets with lenders needing to finalise the resolution plan as an account slips into special mention account category.

Special mention account category.

• SMA category indicates the time period over which repayment on a loan has not been made.
• Banks’ gross NPAs and standard restructured advances were estimated at 12.6% as on September 30, 2017.
• The RBI had estimated SMA 2 advances (where repayment is not made for more than 60 days) to be 3.5% of gross advances.
• ICRA said overall stress levels of banks including SMA0 (overdue between 1 and 30 days) and SMA1 (overdue between 31 and 60 days) borrowers was much higher than the reported GNPA level of 10.3% as on September 30.

Benefits:

• Early identification of stress and resolution will prevent future ever-greening of loans.
•  It will ensure a good financial health for the banking system in the long-term.