Large borrowers fall in line after RBI’s one-day default norm

A central bank rule mandating disclosure of loan default even if it is just by a day is putting the fear of god in big borrowers. Borrowers, who owe more than ?5 crore, are gradually regularizing repayments following the Reserve Bank of India’s (RBI) 12 February circular asking banks to disclose any payment default, shows data accessed by Mint.

Responding to a Right to Information (RTI) query from Mint, RBI said the total outstanding loans of borrowers, who defaulted on bank loans (under the one-day default norm), has declined more than 60% to ?55,070 crore on 30 September 2018 from ?1.53 trillion on 30 June. To be sure, these are not soured assets, but loans where borrowers did not pay instalments on time. However, the data also shows that one-day defaults dipped to a low of ?50,306 crore on 31 August from ?91,280 crore on 31 July and rose 9% in September.

“There is a clear change in borrowers’ behaviour and banks are also more alert in taking up these incidents. A message has been sent to errant borrowers that defaults would not be tolerated,” said Arijit Basu, managing director of the State Bank of India.

Large borrowers, experts say, have started paying up on time due to fears of their companies being referred to the bankruptcy court and eventually losing control of their assets.

In its circular, the central bank asked lenders to institute a board-approved policy for resolution of stressed assets. Banks were told to start the resolution process as soon as a borrower defaults on a term loan and were given 180 days to cure it, failing which the account would have to be referred to the National Company Law Tribunal (NCLT).

Under previous guidelines, lenders had the freedom to initiate the resolution process after 60 days of default.

“Earlier, only the NPA (non-performing asset) classification was taken seriously by borrowers, not defaults. That has changed as banks no longer want any stressed asset on their books and, subsequently, the amount of loans under special mention accounts (SMA) has also dropped,” said Basu. To some extent, the introduction of the Insolvency and Bankruptcy Code (IBC) had also helped, he added.

Asset quality of banks improved in Q2 FY19, with gross NPAs as a percentage of total loans declining from 11.5% in March 2018 to 10.8% in September 2018.

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