As default in payment is only a lagging indicator of a borrower’s financial stress, lenders need to be proactive in credit monitoring to identify financial stress at an early stage rather than wait for a borrower to default, according to the Reserve Bank of India.
Early identification of stress would provide sufficient time for lenders to put in place the required resolution plan, it added.
The central bank observed that enactment of the Insolvency and Bankruptcy Code 2016 (IBC), and the amendment to the Banking Regulation Act, 1949, empowering it to leverage the IBC mechanism for resolving specific stressed accounts, have provided a real opportunity to address challenges such as forbearance in lending and perverse adoption of resolution schemes that feed on each other. The Reserve Bank, in its annual report for 2017-18, said it has taken certain steps over the last few months in this direction, with a focus on certain large-value stressed accounts.
Revised framework
The central bank emphasised that the ‘revised framework for resolution of stressed assets’, issued on February 12, 2018, must be seen as a step towards laying down a steady-state approach for ensuring early resolution of stressed assets in a transparent and time-bound manner so that the maximum value could be realised by the lenders. The revised framework, while leaving the definition of a non-performing asset unchanged, lays down broad principles that should be followed while undertaking the resolution of stressed assets, with ‘bright line tests’ for ensuring credible outcomes.
Taken as a whole, the RBI said the revised framework attempts to improve the credit culture in the country and the trust between counter-parties in a transaction.
This will be critical in ensuring sufficient incentives for the banks to effectively carry out their role as delegated monitors of loans.
The RBI underscored that for a long time India did not have a bankruptcy law in place and, hence, the central bank had to introduce various restructuring frameworks that were designed to emulate the desirable attributes of a bankruptcy law.
via To prevent default, lenders must be proactive in monitoring credit: RBI – The Hindu BusinessLine
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