Dilution in letter or spirit of RBI rule endangers credit culture

Two years since it began the campaign to clean up bank balance sheets with the help of the Reserve Bank of India (RBI), the government is worried that the pain would ripple beyond banks onto the real sector in the form of job losses.

Media reports suggest that the government now wants RBI to relax some of the rules the regulator tightened in February so that small borrowers with genuine pain do not get affected.

Specifically, the government wants the central bank to do away with the SMA (special mention account) tag on borrowers only if they default beyond 30 days, according to an Economic Times report. SMA is a label RBI introduced so that bankers are vigilant on stress and recognize it early on, and pass on the warnings to their peers through a centralized loan reporting system.

The government also wants bankers to get close to a year to try out resolutions before they are referred to the tribunal under the Insolvency and Bankruptcy Code (IBC), reported CNBC-TV18. The current period that RBI allows is six months.

The one-day default tag and the diktat that banks need to put in place a resolution plan complete with timelines even for such a short default sound draconian and perhaps is. Indeed, some genuine borrowers are stymied in their repayment efforts simply because payment due to them has been delayed. Not every promoter is out to take the lenders for a ride.

A defaulter tag for a small company is debilitating as it affects its future dealings with banks or even the market. Punishing small industries and thereby endangering employment prospects is what the government wants to avoid.

Nevertheless, the purpose of asking banks to be on guard for defaults is to make lenders efficient and also to instil a disciplined credit culture into corporate borrowers long used to taking loan repayments lightly. No borrower can now ask his lender to sweeten a restructured deal simply because it helps his business to defer payment. It is not the job of a bank to facilitate business but rather to only fund. Promoters, big or small, should be treated alike in the eyes of the law.

The demand to increase the time given to lenders for putting a resolution plan before kicking the borrower to the corridors of IBC is more dangerous. Many of the top 50 borrowers that RBI asked banks to resolve within six months have underlying assets that have no redeeming value. It is unfair to punish banks by keeping these dead assets on their books in the fleeting hope that tomorrow it may generate value and hence employment. It’s far better to release the assets as early as possible for more productive use.

A strong credit culture among corporates is the key to stave off crony capitalism. The government brought in IBC and now it should uphold the regulator’s efforts. For investors in banks, it’s important that the Augean stables are swept clean.livemint

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