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Context
- Reserve Bank of India (RBI) cited 12 accounts for reference under Insolvency and Bankruptcy Code and also mentioned that RBI will notify revised provisioning norms for cases accepted under the code.
The RBI directives
- RBI has mandated banks to set aside at least 50% of the loan amount as probable losses for cases referred under the code.
- These reports suggest that the RBI has directed a provisioning of 100% of the loan amount for cases that are not resolved in the initial period of 180 days.
- The RBI directive in its newest form will lead to an undervaluation of assets on bank balance sheets.
- Banks in India are already challenged in their ability to raise additional equity from private players.
- The implementation of the RBI directive will further aggravate the situation and render banks reliant upon equity infusion by the government.
What needs to be done?
- The RBI should consider amending the directives and specify provisioning norms that are aligned with the historical recovery rate.
- An acceleration of provisioning after six months to a zero book value should be replaced by a provisioning amount that conforms to the National Company Law Tribunal appointed liquidator’s appraisal value.
- It will prevent fire-sale liquidation and promote bids for assets that preserve “going concern” valuations.
