? Cool Title but what is the news?
The banks would have never anticipated this. New central bank rules are hinting that the worst of the soured-loans expansion is yet to come. The RBI took the financial sector in surprise this week by stopping all of its current loan-restructuring mechanisms with immediate effect. Also, it published new rules that could catch more debt defaulters and drag them to bankruptcy courts.
? Okay, but what does it mean?
In all seriousness, RBI has set strict timelines for lenders to take action against defaulters. If the banks failed to take any action, penalties could be levied. Soured loans include non-performing, restructured or rolled-over loans, shot up to a record high of Rs 9.5 trillion ($148 billion) in the mid of 2017. The major portion of these accounts were run by State-run lenders. In the past four years, India’s bad loans have only become twice. It also caused an economic slow down and years of extravagant lending. Analysts predict that banks will soon have to declare the loans in the schemes as non-performing loans, which will trigger the timeline for banks to take debtors to court.
? Why should I care?
The bigger picture:
This is all pointing towards the fact that banking sector will recognise the new status of the loans and make provisions for them. This was mentioned by Rajkiran Rai, chief executive at state-run Union bank of India. Moreover, he added that in short term, the banks would have problems dealing with the existing accounts. However, in long term, RBI’s steps would surely reap benefits. The new rules would bring discipline to the banking sector, but provisioning costs will escalate as more borrowers are taken to court. Such a step was expected from RBI keeping in mind what happened last year. It ordered about 40 of the India’s largest debt defaulters into bankruptcy courts, ordering creditors put aside at least 50 percent of loan amounts in provisioning.
For you personally:
The RBI’s conclusion is to force more struggling borrowers into bankruptcy proceedings is its latest move to attempt to clean up India’s bad loans mess.
“Under the new process, the RBI requires banks to figure out plans to resolve debts of defaulters with 20 billion rupees ($311 million) or more in outstanding debt by Sept. 1, or take them to bankruptcy court.
Since 50 percent provisioning will be required for these bankruptcy cases as well, the total funds that banks will have to set aside will shoot up, pressuring profits.” analysts said.
Another important thing to note is that bank shares slipped on Wednesday, with the sector index falling 1.4 percent compared with a 0.4 percent fall in the broader market.
Everybody is making their own estimations. Some say that the new rules would do little help to improve loan conditions, while some see the long term welfares. What really would happen, can only be watched as time passes!
Source: Economic Times