RBI discussion paper moots novel steps to curb bad loans
19 Dec 2013 4:54 AM IST
An RBI discussion paper, which is open for public comments till 1 January, suggests an early formation of a lenders committee with timelines to agree to a plan for resolution and incentives for lenders to agree quickly to a plan through ‘better regulatory treatment’ of stressed assets. If bankers fail to reach a resolution plan, the assets in question will attract accelerated provisioning, it says.
The development comes amidst fear of bad loans hitting a record high of around Rs 2.9 trillion by the end of the fiscal or 4.5 per cent of the total banking assets. RBI governor Raghuram Rajan had earlier expressed his resolve to correct imbalances in the system.
The paper Early recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy, also suggests an improvement in the current restructuring process.
Proposals include an independent evaluation of large value restructuring with a focus on viable plans and a fair sharing of losses between promoters and creditors. Promoters refusing to cooperate with the lenders in resolution of the stress will find their future borrowings becoming more expensive, the paper suggests. On the asset sales front, the RBI has shown readiness in allowing a lender to spread any loss over two years provided the loss is fully disclosed and allowing leverage buyouts by specialised entities.
It also suggests takeout financing/refinancing possible over a longer period and not construing it as restructuring.
Apart from the liberal attitude in allowing leveraged buyouts, it says sector specific companies and private equity firms will be ‘encouraged’ to ‘play active role in stressed assets market’.
Monetary policy: Rajan rate hike hat-trick likely today
New Delhi: With food prices showing no signs of abatement, the Reserve Bank of India (RBI) is likely to hike its key policy rate by 0.25 per cent on Wednesday, the third straight increase under governor Raghuram Rajan as part of the war against inflation. Wholesale Price Index inflation in November climbed to a 14-month high of 7.52 per cent as prices of food items such as onions and potatoes surged. Consumer price inflation touched a nine-month high of 11.24 per cent last month. Factory output shrank 1.8 per cent in October.
'Crucially, core inflation as well as non-food manufacturing inflation rose marginally in November. As a result of rising price pressures, RBI is likely to raise the repo rate by 0.25 per cent to 8 per cent on 18 December in its monetary policy review, despite a still-shrinking industrial sector,' Crisil said.
Given the price rises at both the retail and wholesale levels, the RBI, with inflation control as its prime objective, is set to hike the repo rate once again later this week, it said.
Axis Bank chief economist Saugata Bhattacharya believes the probability of a 25 basis point rate hike is more, but 'a 50 basis point rate hike is not off the table.'
However, Indian Overseas Bank chairman and managing director M Narendra said the RBI could maintain status quo in its mid-quarter review if it perceives food inflation moderating in the coming days with improved foodgrain production. RBI governor Rajan, who delivered two repo rate hikes of 0.25 per cent each in as many policy reviews since he took over on 4 September, had mentioned that he considered fighting inflation as the central bank's 'key responsibility.'
According to HSBC chief economist for India and Asean, Leif Lybecker Eskesen, while improved food supplies may help reduce food inflation in coming months, the sticky and high CPI headline and core inflation is testament to the strong underlying inflation pressures in the economy.
The development comes amidst fear of bad loans hitting a record high of around Rs 2.9 trillion by the end of the fiscal or 4.5 per cent of the total banking assets. RBI governor Raghuram Rajan had earlier expressed his resolve to correct imbalances in the system.
The paper Early recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy, also suggests an improvement in the current restructuring process.
Proposals include an independent evaluation of large value restructuring with a focus on viable plans and a fair sharing of losses between promoters and creditors. Promoters refusing to cooperate with the lenders in resolution of the stress will find their future borrowings becoming more expensive, the paper suggests. On the asset sales front, the RBI has shown readiness in allowing a lender to spread any loss over two years provided the loss is fully disclosed and allowing leverage buyouts by specialised entities.
It also suggests takeout financing/refinancing possible over a longer period and not construing it as restructuring.
Apart from the liberal attitude in allowing leveraged buyouts, it says sector specific companies and private equity firms will be ‘encouraged’ to ‘play active role in stressed assets market’.
Monetary policy: Rajan rate hike hat-trick likely today
New Delhi: With food prices showing no signs of abatement, the Reserve Bank of India (RBI) is likely to hike its key policy rate by 0.25 per cent on Wednesday, the third straight increase under governor Raghuram Rajan as part of the war against inflation. Wholesale Price Index inflation in November climbed to a 14-month high of 7.52 per cent as prices of food items such as onions and potatoes surged. Consumer price inflation touched a nine-month high of 11.24 per cent last month. Factory output shrank 1.8 per cent in October.
'Crucially, core inflation as well as non-food manufacturing inflation rose marginally in November. As a result of rising price pressures, RBI is likely to raise the repo rate by 0.25 per cent to 8 per cent on 18 December in its monetary policy review, despite a still-shrinking industrial sector,' Crisil said.
Given the price rises at both the retail and wholesale levels, the RBI, with inflation control as its prime objective, is set to hike the repo rate once again later this week, it said.
Axis Bank chief economist Saugata Bhattacharya believes the probability of a 25 basis point rate hike is more, but 'a 50 basis point rate hike is not off the table.'
However, Indian Overseas Bank chairman and managing director M Narendra said the RBI could maintain status quo in its mid-quarter review if it perceives food inflation moderating in the coming days with improved foodgrain production. RBI governor Rajan, who delivered two repo rate hikes of 0.25 per cent each in as many policy reviews since he took over on 4 September, had mentioned that he considered fighting inflation as the central bank's 'key responsibility.'
According to HSBC chief economist for India and Asean, Leif Lybecker Eskesen, while improved food supplies may help reduce food inflation in coming months, the sticky and high CPI headline and core inflation is testament to the strong underlying inflation pressures in the economy.
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