Fitch Ratings in its latest report has stated that the Reserve Bank of India’s (RBI) new norms for overhauling the mechanism to deal with the bad debt, is likely to push up banks’ credit costs and weaken earnings in the near term. However, it believed that stronger regulatory efforts to deal with the problem of mounting bad loans in Indian banking system along with planned recapitalisation of state banks, could help support a recovery in the sector over the medium term.
The US-based agency has stated that regulators appear increasingly impatient with the slow resolution of NPL stock, which has prolonged the non-performing loan (NPL) cycle. It also noted that the new framework gives banks less discretion over the reporting and resolution of bad assets and attempts to address the complexities involved in resolving the stressed loans of large borrowers. Under the new framework for NPL resolution, it observed that banks will need to report defaults by large borrowers weekly, indicating a more invasive approach to tracking bad assets.
According to the report, the new framework’s overall focus is on recognising and quickly resolving bad loans. The agency also asserted that it is likely to result in a rise in NPLs, as banks are forced to reclassify stressed accounts previously recorded as special mention loans or restructured loans. It added that more accounts are also likely to be pushed toward insolvency courts and into liquidation, particularly since the new guidelines require all of a borrower’s lenders to agree on a resolution plan to keep it away from the courts.