“Stressed assets liquidation key to de-clog bank balance sheets”

Ultimate objective to facilitating quick resolution of stressed assets in a time-bound manner, said RBI governor Urjit Patel

GN Bureau | August 23, 2017


#Reserve Bank of India   #banking   #Urjit Patel   #stressed assets  


Swift, time-bound resolution or liquidation of stressed assets will be critical for de-clogging bank balance sheets and for efficient reallocation of capital, said Reserve Bank of India governor Urjit Patel.
 
Addressing the inaugural session of the “National Conference on Insolvency and Bankruptcy: Changing Paradigm” at Mumbai, Patel said that the government, Insolvency & Bankruptcy Board of India (IBBI) and the RBI have been working together to comprehensively address the challenge through a multi-pronged approach.
 
“The specific measures taken over the last few months, both by the government and the Reserve Bank, to strengthen the legal, regulatory, supervisory and institutional framework are aimed at the ultimate objective of facilitating quick resolution of stressed assets in a time-bound manner.
 
“The sense of urgency imbued in these measures is reflective of the intent not to allow things to drag any further. The recent measures address, inter alia, two key lacunae in the earlier framework: one, the absence of a hard-coded, time-bound period for resolution; and two, the agency and coordination failures at banks and Joint Lenders Forums (JLF) in pushing through viable restructuring plans,” he said.
 
The RBI governor said that The Insolvency and Bankruptcy Code, 2016 is “a watershed towards improving the credit culture in our country”.
 
“Prior to the IBC, India had multiple laws that governed various facets of a corporate rescue and/or insolvency process, without having a comprehensive legal framework that envisages a holistic process applicable to troubled or defaulting companies. The IBC provides for a single window, time-bound process for resolution of an asset with an explicit emphasis on promotion of entrepreneurship, maximisation of value of assets, and balancing the interests of all stakeholders,” he noted.
 
Patel explained that for a creditor, an asset, in most cases, is more valuable when it is a going concern and generates adequate cash flow, as compared to an asset under liquidation. IBC puts a time limit of 180 days (extendable by a further 90 days) within which creditors have to agree to a resolution plan, failing which the adjudicating authority under the law will pass a liquidation order on the insolvent company. So the threat of liquidation, which could potentially result in larger losses for the creditors as a whole, should be sufficient incentive for them to ensure efficient coordination during the insolvency resolution period so as to quickly arrive at a decision.
 
“For the promoter, the biggest cost of being pushed under IBC may be the possibility of losing the firm to potential bidders. This should incentivise the firms to avoid defaults and not over-borrow in the first place. This would improve ex-ante the credit culture in the country.”
 
Patel went on to say that the size and nature of the NPA problem necessitated concomitant measures to signal intent and commitment of the government and the Reserve Bank to meet the challenge squarely. “The IBC was in place but the required action in respect of the large stressed accounts was not forthcoming on the part of banks and JLFs. Part of the inertia may have to do with the initial days of the IBC; but part of it was also the typical (and severe) agency and moral hazard problems of not resolving NPAs when the banking sector is majorly government-owned.
 
“It was to address this market failure that the need for statutory backing to the Reserve Bank to direct reference of cases under IBC was considered necessary. The Banking Regulation (Amendment) Ordinance, 2017 empowers the RBI to issue directions to banking companies to initiate an insolvency resolution process in respect of a default, under the provisions of the IBC. It also enables the Reserve Bank to issue directions with respect to stressed assets and specify one or more authorities or committees with such members as the Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.”
 
The RBI governor said that the continuing endeavour of the Reserve Bank has been to strengthen the supervisory and regulatory framework to ensure timely recognition and disclosure of incipient stress and to facilitate effective and meaningful resolution.
 
“In particular, the decision to do away with the regulatory forbearance regarding asset classification on restructuring of loans and advances effective April, 2015, was a significant step from the perspective of aligning the regulatory norms with international best practices,” he added.
 
 
 

Comments

 

Other News

Gig workforce expected to expand to 2.35 crore by 2029-30

The gig economy has arrived in India, as the Covid-19 pandemic has propelled a flexibility of employment. As many as 77 lakh workers were engaged in the gig economy, constituting 2.6% of the non-agricultural workforce or 1.5% of the total workforce in India. The gig workforce is expected to expand to 2.35

How Antyodaya Saral is simplifying everyday life in Haryana

From obtaining an electricity connection to a driver`s licence, ration card, or old-age allowance, delivery of government schemes and services is an aspect of governance that impacts citizens at various points throughout their lives. The Haryana state government provides over 600 such schemes and services.

A blueprint of India’s economic future: From a former RBI governor

From Dependence to Self-Reliance: Mapping India’s Rise as a Global Superpower By Bimal Jalan Rupa Publications, 184 pages, Rs 695 Bimal Jalan, a former governor of the Reserve Bank of India (RBI), has been one of our finest commentators on econom

Carbon neutrality: distant dream or a possible future?

While many countries have been chasing to reach the carbon neutral status, only a few seem to be living up to their pledges as of now. The famous ’Paris Agreement’ of 2015 was glorified and celebrated that finally 196 countries have united with an intent to mitigate and reduce the greenhouse ga

Agnipath: benefits and challenges on the path ahead

The government this week announced the Tour of Duty or `Agnipath` scheme for the recruitment of soldiers in the armed forces. Under this scheme new soldiers will be recruited only for four years. This radical and far-reaching scheme has attracted mixed reactions from various quarters. While some officials

Connecting credit card with UPI: What it means for you

UPI has become an integral part of our daily lives now. We use it to buy groceries, we use it to send money to friends and family, we use it to purchase tickets, book shows, pay the cab driver, and a whole host of other things due to the ease and availability of such a platform at our fingertips. The best

Visionary Talk: Sanjay Pandey, Mumbai Police Commissioner with Kailashnath Adhikari, MD, Governance Now


Archives

Current Issue

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter