RBI’s disputed circular cut delinquency: Study

Mumbai: An internal study by the central bank has revealed that borrower delinquency reduced after the RBI’s February 12, 2018 circular requiring banks to initiate insolvency within six months of default but deteriorated after the circular was struck down by the Supreme Court in April 2019.
The study was highlighted in an article by RBI executive director Saurav Sinha, which is part of an e-book published by the Insolvency and Bankruptcy Board of India. The article said that insolvency should not be the last resort, comparing a stressed asset to an ice cube with any delay in resolution melting away value. The article has said that a disquieting aspect for the RBI is the time taken for commencement of resolution from the time of filing application. In the article ‘IBC — A banking regulator’s perspective’, Sinha has pointed out that the study showed that notification of IBC alone did not result in any material change in behaviour of borrowers.
The article notes that the most positive impact on the credit culture was by the erstwhile February 12 circular, which resulted in increases in curing of defaults. The upgrades in the SMA-1 (special mention accounts or loans that are in default but not yet NPAs) improved to 18.6% from 5.8% before the circular.
Interestingly, the upgrades came down significantly after the Supreme Court declared that the erstwhile February 12 circular was ultra vires to the Banking Regulation Act, 1949 even though it recovered after the RBI issued rules incentivising early initiation of IBC.
Sinha has said that for the impact of IBC to be felt, the RBI needs to leverage the bankruptcy code in its resolution framework. While some commentators see bankruptcy as an extreme step, the article has said this is not the case.
“It is a disconcerting notion that IBC is seen as a last resort of resolution by many stakeholders including various banks — something that has to be thought about only after all other avenues have been extinguished. The RBI believes in the well-used analogy of a stressed borrower being similar to an ice cube taken out of the refrigerator — the longer it remains unprotected, the more ice melts into water and is lost,” the article said.
The article concludes with the expectation that the recently-introduced pre-packaged insolvency resolution process for small business is extended to all borrowers and is used in difficult resolution involving non-cooperative lenders.

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