The success of any business depends on its ability to keep NPA’ (Non-performing Assets), at the lowest level.
NPAs’ in a business can be either due to cyclical business conditions or willful defaulters. Each category of NPAs’ has to be handled separately to minimize the impact to the business.
Indian Banking has its share of NPAs’. There is a need to ensure that the banking system recognises financial distress early, takes prompt steps to resolve it, and ensures fair recovery for lenders and investors. ‘Improving the system’s ability to deal with corporate distress and financial institution distress by strengthening real and financial restructuring as well as debt recovery’ has been indicated by the Governor, RBI as one of the five pillars on which Reserve Bank’s developmental measures will be built for improving the financial system over the next few quarters.
The Discussion Paper released today is a step in that direction.
The main proposals in the Discussion Paper are summarised below:
- Early formation of a lenders’ committee with timelines to agree to a plan for resolution.
- Incentives for lenders to agree collectively and quickly to a plan – better regulatory treatment of stressed assets if a resolution plan is underway, accelerated provisioning if no agreement can be reached.
- Improvement in current restructuring process: Independent evaluation of large value restructurings mandated, with a focus on viable plans and a fair sharing of losses (and future possible upside) between promoters and creditors.
- More expensive future borrowing for borrowers who do not co-operate with lenders in resolution.
- More liberal regulatory treatment of asset sales
- Lender can spread loss on sale over two years provided loss is fully disclosed.
- Takeout financing/refinancing possible over a longer period and will not be construed as restructuring.
- Leveraged buyouts will be allowed for specialised entities for acquisition of ‘stressed companies’.
- Steps to enable better functioning of Asset Reconstruction Companies mooted.
- Sector-specific Companies/Private equity firms encouraged to play active role in stressed assets market.
- Wilful defaulters may have to pay higher rates: RBI (news.in.msn.com)
- Top 30 NPAs of public sector banks account for a third of bad loans (thehindu.com)