RBI Hones Rules to Hasten Remedy of India's Bad Loans

The Reserve Bank of India's (RBI) recent discussion paper on the management of non-performing loans signals an intensification of regulatory efforts to raise the level of credit discipline and strengthen the credit infrastructure across Indian banking, says Fitch Ratings. Proposed regulations emphasise improvements in credit assessment, increased data sharing among banks and a time-bound resolution of bad loans.


The proposed measures appear credit supportive to us. But these will take time to yield concrete results, and its effectiveness also depends on the rigorous implementation of underlying guidelines. This will not be possible unless banks proactively come forth in recognising lapses in their credit management framework and take necessary bold steps at addressing underlying issues.


The much awaited report comes against the backdrop of a sharp increase in stressed assets in the banking system. It also comes amid the regulator's increasing discomfort towards asset quality management at Indian banks in the current credit cycle.


The main objective appears to be to alter credit behaviour, for instance by introducing incentives for improving credit coordination among banks and quickening bad credit resolution. They also suggest penalties (such as accelerated provisions) for limiting delays in resolution or recovery related activity, or deliberate concealment of stressed accounts.


Additional support comes from the regulator's punitive stance towards reckless borrower behaviour; and the requirement of independent evaluation for large value restructuring of loans in excess of INR5bn.


The proposals contained in the discussion paper supplement existing guidelines on asset recognition. They take a more holistic approach to credit appraisal and monitoring with a greater focus on timely recognition and redressal of problem loans, with relatively quicker remedial action to keep such loans from becoming chronically problematic.


Fitch expects the RBI to implement bulk of the guidelines, as drafted. However, parallel efforts aimed at stimulating a relatively stagnant after-market for asset and non-performing loan (NPL) sales - such as encouraging private equity participation or NPL sales among asset reconstruction companies - may take longer than expected.


The strengthened asset quality regulatory framework is applicable for all Indian banks. But it is more relevant for state-owned banks which have witnessed a particularly steep increase in impaired assets and currently accounts for a disproportionate share of the stressed assets burden (state owned banks accounts for around 90% of existing NPL stock, at INR1,940bn, at the end of the fiscal year ended in March 2013 (FY13).


The Indian banking system reported total stressed assets (gross NPL plus standard restructured loans) of 9.3% at FY13 compared to 5.5% in FY10, which characterised the post-Lehman crisis phase. Fitch expects stressed assets in the system to rise to 15% by FY15.

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