One year of RBI's 12 February circular: A look at charts that depict bad loan scenario after central bank's crackdown on NPA menace

  • The RBI had tightened rules to make banks identify and tackle any non-payment of loans

  • The central bank provided for a strict 180-day timeline for banks to agree on a resolution plan

  • Banks will face penalties in case of failure to comply with the new guidelines

Exactly a year ago, in a bid to hasten the resolution of bad loans, the Reserve Bank of India (RBI) had tightened rules to make banks identify and tackle any non-payment of loan rapidly by issuing a circular on 12 February 2018.

The Reserve Bank of India had abolished half a dozen existing loan-restructuring mechanisms and instead provided for a strict 180-day timeline for banks to agree on a resolution plan in case of a default or else refer the account for bankruptcy.

Under the new rules, insolvency proceedings would have to be initiated in case of a loan of Rs 2,000 crore or more if a resolution plan is not implemented within 180 days of the default.

 One year of RBIs 12 February circular: A look at charts that depict bad loan scenario after central banks crackdown on NPA menace

Representational image. Reuters.

Banks will face penalties in case of failure to comply with the guidelines, the RBI had said.

The revised framework had specified norms for "early identification" of stressed assets, timelines for implementation of resolution plans, and a penalty on banks for failing to adhere to the prescribed timelines.

The RBI had also withdrawn the existing mechanism which included Corporate Debt Restructuring Scheme (CDR), Strategic Debt Restructuring Scheme (SDR) and Scheme for Sustainable Structuring of Stressed Assets (S4A).

Under the new rules, banks must report defaults on a weekly basis in the case of borrowers with more than Rs 5 crore of loan. Once a default occurs, banks will have 180 days within which to come up with a resolution plan. Should they fail, they will need to refer the account to the Insolvency and Bankruptcy Code (IBC) within 15 days.

A year has since passed the RBI issued the circular. It would be prudent to assess the impact of this circular on the bad loans of the banking sector.

In the immediate quarter ending March 2018, after the RBI circular was issued, the total bad loans of the banking sector rose by a massive Rs 1.39 lakh crore to Rs 10.25 lakh crore in March 2018 quarter. However, from the next quarter, it started showing a declining trend as it fell to Rs 10.03 lakh crore in the June 2018 quarter. It steadily declined in subsequent quarters—Rs 9.99 lakh crore in September 2018 quarter,  Rs 9.66 lakh crore in December 2018 quarter. Thereby in the nine-months ending December 2018, the gross NPAs of the banking sector fell by Rs 59,000 crore in total and during the same period net NPAs of these banks declined by a whopping Rs 99,151 crore due to higher provisioning for bad loans.

Here is the NPA trend in the banking sector in charts.

 

Non-performing assets in Rs crore
Public sector Private Total
Quarter-end Gross Net Gross Net Gross Net
Dec-17 777266 415705 109194 53945 886460 469649
Mar-18 896601 454473 128627 63645 1025229 518117
Jun-18 874071 426435 129333 59151 1003404 485586
Sep-18 868812 408279 130219 55255 999032 463534
Dec-18 833362 366819 132984 52147 966346 418967
Change in 9 months (Dec 2018 over Mar 2018) -63240 -87653 4357 -11497 -58883 -99151
Data Source: CapitalinePlus

So far, it seems the RBI circular on stressed assets has worked in favour of the banking industry as a whole. It would be interesting to see the fate of the RBI's contentious 12 February, 2018 circular going ahead as it has been challenged by many industry bodies in the Supreme Court.

However, during his first monetary policy presser, the new RBI governor Shaktikanta Das categorically denied any move towards a rethink or relook at the contentious circular on new NPA recognition norms which has caused discomfort to North Block mandarins, thus endorsing the stand taken by his predecessor Urjit Patel.

--With PTI inputs

Updated Date: Feb 14, 2019 16:03:18 IST