If there was one stand-out feature of former Reserve Bank of India Governor Urjit Patel’s tenure, it was the zero-tolerance approach he took towards the country’s lenders. Stressed asset rules were tightened, lending restrictions were placed on weak banks, increased disclosures were mandated and those seen in breach of rules were not spared.
Bankers were an unhappy lot those days. The RBI top brass was rarely interested in hearing their grouses, leave alone addressing them.
Shaktikanta Das, who was appointed as RBI Governor six months ago on Dec.11, 2018, has given bankers a patient hearing and, in many cases, taken a softer approach to bank regulation. Less stringent stressed asset rules, easing of the corrective action framework and a deferral of guidelines on external bench-marking of loans and tougher accounting standards have all made life easier for bankers in the last six months.
Two senior public sector bankers, who spoke to BloombergQuint on conditions of anonymity, said that the RBI under Das has proved to be a friendlier regulator.
According to the first banker quoted above, over the last few years the regulator had taken an adversarial approach to regulations, which was tough on lenders. Under Das, this has changed and the central bank is willing to hear out lenders on practical issues they are facing, this banker said.
The second lender quoted above said that when regulators listen to stakeholders, it creates a more practical regulatory environment, which ensures compliance but is not taxing on banks. He too spoke on condition of anonymity.
The Return Of Forbearance
Among the first changes announced by Das after he took over was the introduction of a restructuring scheme specifically directed as micro, small and medium enterprises (MSMEs).
On January 1, the regulator allowed banks and NBFCs to restructure MSME accounts which were in default, but were classified as standard accounts as of that date. The rules were applicable for cases where the aggregate debt exposure being restructured was under Rs 25 crore. This one-time scheme would not impact the account’s asset classification.
Experts saw this as a return to forbearance, something that the RBI had decided to firmly stay away from since 2013. In a note issued then, India Ratings Pvt. Ltd said that the dispensation may encourage some of the MSME borrowers, which are otherwise operating satisfactorily, to opt for the scheme and impair the credit discipline.
To be sure, lenders have been using this window sparingly so far.
Dilution Of Prompt Corrective Action Norms
The prompt correct action (PCA) framework was strengthened in April 2017 to ensure that weaker banks would be forced to cut back on risky business and eventually come out stronger. Eleven government owned banks and one private bank was under the PCA framework when Patel exited the RBI.
Since then, six have exited. Some even before they met the stated thresholds beyond which a bank is placed under PCA.
On January 31, the regulator announced that Bank of India, Oriental Bank of Commerce and Bank of Maharashtra would be allowed to exit the framework as they were no longer in breach of the minimum threshold that the RBI had set for invoking PCA. While all three banks saw their net non-performing asset (NPA) ratio fall below the RBI’s threshold of 6 percent, they still had not managed to have positive return on assets, which was also criteria laid down by the regulator.
Later in February, the RBI released Allahabad Bank and Corporation Bank for similar reasons. In case of these banks, the regulator said that the government had assured adequate capital support to these lenders, which gave the RBI comfort.
The RBI also released old private sector lender Dhanlaxmi Bank from the PCA framework in February. However, in this case, the bank’s performance metrics had improved and an exit from the framework was justified.
Deferral Of Key Regulations
Since Das took over as the Governor, the RBI has deferred the implementation of two key regulations.
IndAS, which was expected to bring in a more conservative approach to bad loan accounting across Indian banks and push them to make higher provisions, was to be implemented from April 2019 after a one-year delay.
However, in March, the implementation was deferred till further notice.
The banking regulator also went back on its decision asking banks to link floating rate retail loans to an external benchmark. While addressing the press after his first monetary policy committee meet in December 2018, Das referred to the guidelines announced in October as a draft and said that the regulator was in consultation with stakeholders on the issue. Later, in April, the RBI said that benchmarking of lending rates was deferred till further notice.
Linking lending rates to external benchmarks was opposed by the banking industry, as bankers believed that it would bring undue volatility to interest rates and cause higher rates of default for retail customers. The move, however, would have improved the transmission of monetary policy.
Easier Stressed Asset Rules
Last week, the banking regulator released a fresh set of restructuring guidelines, after the Supreme Court struck down the previous norms in April. The guidelines introduced some changes to the resolution of stressed assets, which are intended to ease the process for banks.
The RBI did away with the one-day default norm, where banks were expected to swing into action as soon as an account defaulted and brought in a 30-day review period to figure out the best way forward. This is in contrast to the RBI’s earlier stand, which had been defended by deputy governor NS Vishwanathan.
While the RBI introduced penal provisions for delayed implementation of resolution plans, it also allowed lenders to write back the additional provisions once a case was admitted under the insolvency and bankruptcy code (IBC). The regulator also allowed banks to upgrade a restructured account to standard, after the borrower repaid 10 percent of the outstanding dues, as opposed to the previous 20 percent requirement.
The new guidelines considered and accepted many of the suggestions that the bankers had presented to the RBI in April, Rajnish Kumar, chairman, SBI said on Monday.
“The revised prudential framework for resolution of stressed assets announced on Friday strikes a fine balance between tight regulatory timelines mandated previously for resolving stressed assets, and inordinate delays that occurred in the past when resolving and provisioning for such assets,” said rating agency CRISIL in a note on Monday.