Pressure on RBI to ease NPA norms

Pressure on RBI to ease NPA norms

 What has happened?

The finance ministry is in discussion with the Reserve Bank of India (RBI) for relaxation of norms regarding stressed asset resolution that was announced in February. This follows representation by large banks to the ministry officials as they worry about pressure on profitability due to the revised guidelines

The issue: Conditions for resolution of stressed assets by RBI are strict

• RBI’s mandate to implement a resolution plan even if the loan is overdue for a day
• RBI had also mandated that if the solution plan was not implemented within 180 days, bankruptcy process should be initiated
• Banks have to make 50% provision for accounts that are referred to the NCLT for insolvency proceedings
• if the principal or interest is overdue for one day to 30 days, the account is identified as Special Mention Account – 0 (SMA-0) category
• If it is overdue for 30 to 60 days, it comes under the SMA-1 category and if it is overdue for more than 60 days, till 90 days, it falls under SMA-2 category
• If a loan is not repaid for more than 90 days, it is classified as non-performing asset (NPA).

 Effect: Rise in provisioning capital of the banks

The conditions of the resolution plan, as laid down by RBI, are so stringent that it will increase provisioning requirement. That is, banks have to set aside more capital

 Cash flow issues

It is quite possible that customers are facing some cash flow issues and it is a genuine problem so the conditions are strict for resolution process.