RBI plans incentives for lenders to take defaulters to bankruptcy court

Chennai, Apr 6: The Reserve Bank of India (RBI) is planning to provide incentives to lenders to encourage them to take defaulting borrowers to the bankruptcy court, according to reports.

In a move to overcome the hurdle created after the Supreme Court struck down the Reserve Bank of India’s 12 February, 2018 directive that gave defaulting companies 180 days to agree on a resolution plan with lenders or be taken to bankruptcy court to recover debt of Rs 2,000 crore and above, the apex lender is weighing a plan to ‘incentivise’ lenders to take defaulters to bankruptcy court.

Under the RBI norms, an account is classified as a non-performing asset (NPA) if it is not serviced for 90 days. The central bank also introduced the concept of a one-day default, under which banks have to identify incipient stress when repayments are overdue even by a day.

Last Monday, News Today reported that in the backdrop of the Supreme Court quashing an RBI circular, issued on February 12, 2018, a revised set of rules is under works and would be released soon. Now, citing people aware of the development, the business daily ET said RBI is considering a proposal to assign a ‘lower risk weight’ on loans to companies against which action has been initiated under the Insolvency & Bankruptcy Code (IBC) of 2016.

“A lower risk weight would act as an incentive to banks as it would help them in conserving capital. It would be a regulatory change that would be very much within RBI’s domain,” the report quoted a person familiar with the proposal as saying.

“Lower risk weights on IBC companies should be an acceptable regulation — simply because initiating corporate insolvency is a step towards resolution of NPAs (nonperforming assets),” a senior banker told ET.

Worth mentioning here is a new framework for debt resolution has been in making since the top court ruled that the February 12, 2018 circular was beyond the scope of the RBI’s powers. “Since it would not be possible (post the court ruling) for the RBI to fix a deadline of 180 days or even one year (from the day of default) for banks to invoke the insolvency law, it’s thinking of ways to incentivise lenders for using the IBC,” said a banker.

NPA resolutions lag
Of the over two dozen companies named by the Reserve Bank of India (RBI) in its second list of large non-performing assets (NPAs), only three – Ruchi Soya Industries, EPC Constructions and ARGL – have come close to being resolved successfully through the corporate insolvency resolution process (CIRP) since August 2017, when the list is known to have been sent to banks.

The second list involved companies with a total principal outstanding of Rs 1.28 lakh crore, according to a March 2018 report by CLSA. For these three accounts, their respective committees of creditors (CoCs) have selected successful bidders – Patanjali Ayurved for Ruchi Soya, Royale Partners for EPC Constructions and CarVal-Arcil for ARGL.