RBI Das says COVID debt recast balanced depositor-borrower interests

Wednesday, Sep 16, 2020


MUMBAI – Reserve Bank of India Governor Shaktikanta Das today said it was necessary to see the balanced approach taken by the central bank in drafting the debt restructuring scheme provided to companies and individuals impacted by COVID-19.


Responding to demands for sector-wise relief made by members of Federation of Indian Chambers of Commerce & Industry at a virtual event today, Das said that the scheme had taken into consideration the stress faced by various companies where cash flows had been hit, but at the same time also kept in mind the need for financial stability.


"It had to be a very balanced decision on the part of the Reserve Bank," Das said.


"On the one hand, we had to keep in mind the requirement of protection of the interest of depositors, need to maintain financial stability and the banking sector. We don’t want a repeat of the situation that India experienced four-five years ago where the non-performing assets rose very steeply."


On the other hand, Das said that RBI was "equally mindful" of the fact that COVID-19 has negatively impacted a large number of businesses, and there was need to provide some relief to such entities that would otherwise not have seen such stress.


"Naturally, businesses which are otherwise viable but because of temporary disruptions in activity have genuine cash flow problems. So the focus is to assist, and to enable such businesses which are otherwise viable but facing problems due to cash flow drying up. The emphasis is to enable these companies to come back to normalcy and to resume their activities," he said.


He pointed out that eventually what banks lent out as loans was depositors' money, and there were "crores" of such depositors while borrowers would number in "lakhs". He added that it was necessary for the RBI and banks to protect the small depositors, middle class depositors and retired people who had put savings as deposits.


Das said that the aspect of “financial stability” had to be kept in mind when drafting the resolution package for COVID-19 as banks played an important role to spur economic development in an emerging market economy like India. He acknowledged the role played by banks in the economic response to COVID-19 issues.


Das said that both sides had to be managed to ensure that businesses were revived but non-performing asset ratios were also kept low, that helps with quicker economic recovery.


This was a reference to the bad loan problems that ailed Indian banks in 2012-14, that eventually led to RBI starting an industry wide clean via asset quality review in 2015-16. The review led to a sharp rise in reported bad loans for banks, and erosion of capital. Many banks had to be placed under prompt corrective action framework, with state-owned banks receiving large doses of recapitalisation to meet regulatory norms, but followed by a large number of these banks being merged to create larger public sector banks. The Insolvency and Bankruptcy Code enables banks to also recover their dues and replace errant promoters, powers which were not available under past schemes.


The COVID-19 debt resolution process builds on the Jun 7, 2019 stressed asset norms issued by the RBI under which banks have an incentive to take companies to National Company Law Tribunal, if they don’t meet debt milestones. The COVID-19 resolution also has stringent entry criteria so that only companies impacted by the pandemic get relief under this special window, with K.V. Kamath committee providing over arching criteria that banks can lean on when assessing corporate eligibility and treatment under loan recast.


Das commended the Kamath committee for conducting extensive consultations with industry and companies while coming up with this criteria in a short timeframe of 30 days.


He did not comment on repeated suggestions to allow a four-year window for debt moratorium or modalities on how the banks would structure the loan recast, but added that RBI would consider all the suggestions made by industry members.


Das said that RBI would not like to micro-manage the functioning of banks as these were commercial decisions based on their assessment of risk on borrowers impacted by COVID-19 or what margins they must maintain for their borrowers. On demands for faster timelines to be given to banks to deal with such cases, Das said that this cannot be dictated by RBI but added that Indian Banks' Association could deliberate on these issues.


Sangita Reddy, president of FICCI said that there were "deserving" companies that would not be able to meet the stringent restructuring norms set under the one-time debt resolution framework announced for COVID-19. She said that FICCI had made a submission to this effect to RBI, and would provide an updated list soon.


Das was also faced with recurring requests for a review of the changes in current account norms where companies have to maintain such accounts with those banks they have material lending relationships with. Das said that this had been done to ensure the lending bank and consortiums had access and visibility to the cash flows of the borrowers. He, however, added that based on the requests, he would look into any operational issues that may be there in companies and banks adhering to these norms.


Das said that the earlier system of 'no-objection' being given by the lending bank has not worked, and led to issues, necessitating this change.  End


Reported by T. Bijoy Idicheriah

Edited by Maheswaran Parameswaran


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