Money & Banking
RBI talks about making borrowing expensive for defaulters

In a discussion paper on framework for revitalising distressed assets, the RBI has proposed several measures including making future borrowing expensive for defaulters and setting up a central repository for collecting information on large credits

Reserve Bank of India (RBI) has released a discussion paper on framework for revitalising distressed assets or non-performing assets (NPAs). The discussion paper outlines a corrective action plan that will incentivise early identification of problem cases, timely restructuring of accounts which are considered to be viable, and taking prompt steps by banks for recovery or sale of unviable accounts. The paper also talks about making future borrowing more expensive for borrowers who do not cooperate with lenders.


Under the proposals, RBI will set up a Central Repository of Information on Large Credits (CRILC) to collect, store, and disseminate credit data to lenders. Before a loan account turns into an NPA, banks should identify incipient stress in the account by creating a new sub-asset category, special mention accounts (SMA) in line with instructions issued by RBI.


"Banks will have to furnish credit information to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs5 crore and above. While all scheduled commercial banks will mandatorily contribute their credit information on their borrowers/ customers as above, systemically important non-banking financial companies (NBFC-SI) will also be asked to furnish such information. In addition, banks will have to furnish details of all current accounts of their customers with outstanding balance (debit or credit) of Rs1 crore and above," the central bank said.


Banks will be required to report, among others, the SMA status of the borrower to the CRILC. Reporting of an account as SMA-2 by one or more lending banks/ NBFC-SIs will trigger the mandatory formation of a Joint Lenders’ Forum (JLF) and formulation of Corrective Action Plan (CAP).


RBI said, "With a view to limiting the number of JLFs to be formed, it is proposed that JLF formation would be made mandatory for distressed corporate borrowers, engaged in any type of activity, with aggregate fund based and non-fund based exposure of Rs100 crore and above. Lenders, however, have the option of formation of JLFs even when the aggregate fund-based and non-fund based exposures in an account are less than Rs100 crore."


To resolve the stress in the account, the JLF may explore various options like rectification, restructuring and recovery. "Wilful defaulters will normally not be eligible for restructuring. However, the JLF may review the reasons for classification of the borrower as a wilful defaulter and satisfy itself that the borrower is in a position to rectify the wilful default. The decision to restructure such cases should however also have the approval of the board/s of individual bank/s within the JLF who have classified the borrower as wilful defaulter," RBI said.


Here are the main proposals in the paper titled, ‘Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy’...


  • 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.
  • Lenders 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.


Going forward, RBI said, "While some regulatory and governmental measures may be required to address the factors that are leading to deteriorating asset quality, there is an equal need for proper credit discipline among lenders."


Comments on the Discussion Paper may be sent to the Principal Chief General Manager, Reserve Bank of India, Department of Banking Operations and Development, Central Office, 12th Floor, Central Office Building, Shahid Bhagat Singh Marg, Mumbai-400 001 or emailed to [email protected] by 1 January 2014.



Gopalakrishnan T V

3 years ago

What RBI now contemplates to contain NPAs is only waste of energy, and money. It only helps to camouflage NPAs officially and helps to postpone the casualties of NPAs for a few more days. Disease will remain and it will gradually kill the banks and the the Corporates and other borrowers. The approach is devoid of seriousness of the issue and is an eye wash simply put.

Rajesh Kumar

3 years ago

Has this discussion paper been approved to bring into action or still under discussion.:

Gopalakrishnan T V

4 years ago

The solution suggested by RBI only adds to administrative expenses and creation of avoidable hassles both to the lenders and borrowers without having any tangible benefits. Unless and until both borrowers and lenders are simultaneously disciplined through an internally developed self correcting mechanism this problem of Non performing Assets will continue to pester the banks and the depositors and other stakeholders will bear the brunt.Since the issue is between the lenders and the borrowers and lenders have first hand information about the borrowers going astray and the accounts showing symptoms of sickness and possible defaults,the borrowers can be warned and penalised for being indisciplined. The penalty amount should be as small as possible and as and when, the nature of irregularities in the accounts increase and the borrowers' behaviour is not amenable to discipline, penalty amount can be suitably increased. This amount kept in a separate account styled Precautionary Margin Reserve can be of good help to take care of NPAs and banks having the funds with them can pay a small interest to the funds. If the regulator in its assessment of banks credit portfolio observes that banks do extend undue favours to ineligible borrowers and the accounts are turning sticky can fine the banks and ask them to contribute to the fund PMR. This way both banks and borrowers can be disciplined to prevent the formation of NPAS and even with all these, NPAs get generated, this fund can be used to write off of such NPAS. Basically the NPAS are taken care of by borrowers themselves with a small supplement from the lenders for their casual and callous approach in disciplining the borrowers at the appropriate time. The present approach will prove to be another eyewash to fool the stakeholders of banks and that too adding to the cost of administration. The solution is not workable and complex in nature.

Sensex, Nifty cautious ahead of the RBI monetary review: Tuesday closing report

A close well above 6,200 is needed to for Nifty to be back on an uptrend

Yesterday, we mentioned that Nifty has to stay above Monday’s low and close -above 6,210 for an upmove to start. This did not happen today and Nifty made its lowest low of December. The market today opened with full optimism after the US economic data indicated solid improvements in business activity across the country. After five days of negative opening the benchmark opened in the positive and had a range bound session until the end of the morning session. With the beginning of the noon session, the indices started heading down.


The Sensex opened at 20,732 while the Nifty opened at 6,178. At the beginning of the session itself the indices hit their days high at 20,784 and 6,191. At the end of the session the Sensex hit a low of 20,595 and closed at 20,612 (down 47 points or 0.23%) while the Nifty hit a low of 6,133 and closed at 6,139 (down 16 points or 0.25%). The NSE recorded a volume of 52.85 crore shares, marginally higher than yesterday.


Among the other indices on the NSE, the top five gainers were Pharma (1.76%); FMCG (0.67%); Consumption (0.63%); MNC (0.61%) and Media (0.53%) while the top five losers were Finance (1.57%); Bank Nifty (1.44%); PSU Bank (1.01%); Energy (0.76%) and Service (0.71%).


Of the 50 stocks on the Nifty, 23 ended in the green. The top five gainers were Ranbaxy (4.81%); Bharti Airtel (4.58%); Cipla (3.06%); Sun Pharma (2.18%) and NMDC (1.94%), while the top five losers were HDFC Bank (3.67%); Coal India (2.96%); NTPC (2.21%); HDFC (1.97%) and Bajaj Auto (1.73%).


Of the 1,223 companies on the NSE, 511 closed in the positive, 645 closed in the negative while 67 closed flat.


Market now looks ahead for Reserve Bank of India mid-quarter monetary policy review tomorrow and the Fed’s two-day meeting starting today, where the discussion over the $85 billion of monthly bond purchases would take place.


US indices closed in the positive on Monday. The Empire State manufacturing index rebounded in December after a slump in November. Markit's US Purchasing Managers' Manufacturing index rose further into expansion at 54.4. Industrial production jumped 1.1% in November, its biggest one-month gain in a year, and surpassed its pre-recession peak, versus a 0.1% fall the month before.


Asian indices closed mainly in the green. Jakarta Composite was the top gainer which rose 1.37% while the Shanghai Composite was the top loser which fell 0.45%. European indices were trading in the negative while US Futures were trading flat.


Optimism in the air for telcos following EGoM announcements

According to CARE Research, M&As in telecom would take some time to pick up, as players would wait for Lok Sabha election results and clarifications on other issues like one-time charge for excess spectrum and spectrum trading guidelines

Consolidation-hungry telecom sector waited long for clear merger and acquisition (M&A) guidelines as hyper-competition kept bleeding everyone as tariffs nose-dived over the years. Recently, the empowered group of ministers (EGoM) has cleared M&A guidelines which have enthused most of the stake-holders in the industry with increased market-share limits.

However, according to CARE Ratings, the M&A activity would take some time to pick up as players would wait for Lok Sabha election results and clarifications on other issues like one-time charge for excess spectrum and detailed guidelines of spectrum trading.


Telecom wireless space in India is getting divided on the following lines (i) Top three incumbents with deep pockets – Bharti Airtel, Vodafone, Idea, (ii) Other incumbents with struggling balance sheets – Reliance Communication (RCom), Tata Teleservices, Aircel, Loop, (iii) Government owned – Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) (iv) the new comers - Telewings and Sistema with backing from their foreign parents and, (v) new players with Indian parent like Videocon.


According to CARE Research, consolidation would be driven to acquire subscriber base or spectrum. Incumbents are the major contenders for the ‘consolidator’ tag. There might be possibilities of a three-way merger among Tier-II players like Tata Teleservices, Sistema, Aircel and Himachal Futuristic Communications Ltd (HFCL).


CARE Research said it believes that the increased market share limit (50% from earlier 35%) would avail enough room for larger players like Bharti Airtel and Vodafone to go for acquisitions in most of the circles. "Consolidation would provide much needed exit to some of the weaker players along with reducing the hyper-competitive environment in the sector. At the same time, with increased market-share larger players would get some pricing power but would not result in substantial change in the dynamics of the sector as voice and, to some extent, the data business being commoditised in nature. It would allow better spectral efficiencies for the sector as there is a large variance in the subscribers per MHz metrics. It will also lead to better utilisation of passive infrastructure like telecom towers and networks," the ratings agency added.


Decisions pertaining to spectrum in 1800 MHz band

After a subdued response to auctions held in November 2012 and March 2013, government is again planning to auction spectrum in the 1800 MHz band associated with cancelled licenses. The spectrum being licensed would include spectrum which had remained unsold during last two auctions and some additional spectrum freed from other agencies such as defence. The incumbent operators (Bharti Airtel, Vodafone, Loop, Idea etc) whose licenses are going to expire over next few years have to participate in the auction to acquire the spectrum. As higher reserve price was presumed to be predominant reason for muted participation, government asked TRAI to come out with new pricing. Telecom Commission has increased the reserve price partially and the same was approved by EGoM.


CARE Research said it believes that the reduction in reserve price is a welcome move for the industry which is already reeling under the debt-burden raised for 3G-BWA auctions and subsequent roll outs. It said, "Government’s decision to put more spectrum on table would help in price discovery as it would remove the artificial scarcity of spectrum. Additional spectrum would help players reduce on network expansion costs as there is a trade-off between spectrum and additional towers. As the data usage increases, players would need additional spectrum. Also, the players whose licenses are expiring over next few years can plan in advance and participate in the auction."


Decisions pertaining to spectrum in 900 MHz band

Telecom licenses issued in 1994 to incumbent players Bharti Airtel, Vodafone (then Hutch) and Loop in Delhi, Mumbai and Kolkata circles would expire in 2014. These operators collectively hold 46 MHz of spectrum in the more efficient 900 MHz band in these three metro circles and were constantly pushing for an extension of another 10 years. Due to the limited availability (around 20 MHz in each circle) of the spectrum in this band, most of it is lying with incumbent operators (first 2-3 operators), which puts them in an advantageous position as against new players. In order to create a level playing field, the government has decided to auction the spectrum as and when the licenses expire.


CARE Research said it believes that removal of reservation for incumbents who already hold the spectrum is slightly negative whereas a cap of 5 MHz for 900 MHz spectrum would act as a dampener for the incumbent players. "Even if the existing holders of the spectrum go for maximum spectrum they can bid for, there would 6MHz, 6MHz and 4MHz spectrum remaining in Delhi, Mumbai and Kolkata circles respectively. This implies expected participation from other operators like Idea and RCom and even slightly stretched possibility of Reliance Jio participating in the auction," the report added.


Decision pertaining to Spectrum Usage Charge (SUC)

In case of Spectrum Usage Charge (SUC), the EGoM has decided to continue with the current cascading SUC charges until the Department of Telecom (DoT) decides on the flat rate. The current SUC ranges from 3 to 8%of the adjusted gross revenue (AGR), depending on the quantum of spectrum held by a licensee. However, TRAI had recommended a flat SUC of 3%for all (including 3G and BWA players) acquiring spectrum through auctions and 3-5 % for spectrum without auctions, so that the disincentive to buy additional spectrum in the existing SUC regime gets eliminated. Currently average SUC collected by the government is around 3.6% of AGR.


CARE said, "If approved, this will be beneficial to the most of the telecom players, especially incumbent players, who are paying more than 5% SUC on Administered spectrum. BWA players like Reliance Jio will however be at a disadvantage as it implies an increase of SUC from the earlier 1% to 3% of AGR. On the flip side, approval of the flat 3-5% SUC rate would result in a loss of nearly Rs13.56 billion for the government."


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