RBI has introduced several regulatory mechanisms to help banks deal with stressed assets and improve lending practices. This includes an early warning database, the Joint Lenders Forum for debt restructuring, and the Central Repository of Information on Large Credits to collect data on loans over Rs. 50 million. The Debt Recovery Tribunals and SARFAESI Act provide ways for banks to recover loans from defaulters, while Asset Reconstruction Companies purchase stressed assets from banks. Further reforms are underway like limiting consortium members, a unified bankruptcy code, and setting up a Public Debt Management Agency.

1. Regulatory Mechanisms
Part 9
Indian Banking
Moving towards a new landscape

2. Regulatory Mechanisms
RBI has progressively made it easier for banks to recognize and deal with
loans extended to distressed projects. RBI offers a lot of flexibility to banks in
dealing with the stressed asset problem. In this regard, RBI has introduced
several measures including an early warning database of large loans, the Joint
Lenders Forum, the Strategic Debt Restructuring process and the 5/25
mechanism, etc.
RBI has been making constant efforts to enable banks to improve the quality
of lending. Keeping in view the importance of credit discipline for reduction in
NPA level of banks, banks have been advised to scrupulously ensure that their
branches do not open current accounts of entities which enjoy credit facilities
(fund based or non-fund based) from other banks without specifically
obtaining a No Objection Certificate from the lending bank(s). Banks should
take a declaration to the effect, that the account holder is not enjoying any
credit facility with any other bank.

3. Regulatory Mechanisms
RBI realizes that Information sharing is a very critical aspect in financial
transactions and any gap in information can transform into risk cost for the
bank. In this regard, Credit Information Companies (CICs) play a major role in
information sharing. Banks and Financial Institutions are required to submit
the list of suit-filed accounts and willful defaulters of Rs. 25 lakh and above
every quarter to CICs. CICs have also been advised to disseminate the
information pertaining to suit filed accounts and Willful Defaulters on their
respective websites. The banks / Financial Institutions have been advised to
furnish the data in respect of willful defaulters (non suit filed accounts) of Rs.
25 lakhs and above to CICs on a monthly or a more frequent basis with effect
from December 31, 2014. This ensures that such information to be available
to the banks / Financial Institutions on a near real time basis.

4. Regulatory Mechanisms
Further, the Central Electronic Registry under SARFAESI Act became
operational on March 31, 2011 with the objective of preventing frauds in loan
cases involving multiple lending from different banks on the same immovable
property. As per the new norms, transactions relating to securitization and
reconstruction of financial assets and those relating to mortgage by deposit
of title deeds to secure any loan or advances granted by banks and financial
institutions, as defined under the SARFAESI Act, are to be registered in the
Central Registry. The records maintained by the Central Registry will be
available for search by any lender or any other person desirous of dealing
with the property. Availability of such records prevents frauds involving
multiple lending against the security of same property as well as fraudulent
sale of property without disclosing the security interest over such property.

5. Regulatory Mechanisms
Despite the information sharing mechanisms (as detailed above), if the loans
were to still go bad, restructuring mechanisms have been spelt out to help a
borrower who has a viable project or a viable business proposition. With a
view to putting in place a mechanism for timely and transparent restructuring
of corporate debts of viable entities facing problems, a Scheme of Corporate
Debt Restructuring (CDR) was started in 2001 for quicker recovery/
restructuring of stressed assets.
Under a corporate debt restructuring plan, the lenders give the company, the
benefit of reduced interest rates and a moratorium period for repayment, and
in some cases, lender sacrifice a part of the principal amount.

6. RBI recently announced the SDR scheme to address some of the gaps in the
CDR scheme. As per the new norms under SDRS, the lenders will have the
right to convert their outstanding loans into a majority equity stake in a
defaulting company if the company fails to honor its debt commitments
agreed under a restructuring plan. It is expected the SDRS will enhance the
bargaining power of banks during debt restructuring negotiations and ensure
better compliance among borrowers with their restructuring plans.
Regulatory Mechanisms

7. Regulatory Mechanisms
In the backdrop of the slowdown of the Indian economy resulting into stress to a
number of companies / projects and increase in Non-Performing Assets (NPAs)
and restructured accounts in the Indian banking system during the recent years,
a need was felt to recognize the stress in the economy early on a real time basis
and take preventive and / or corrective actions in order to preserve the
economic value of banks' assets. In view of this, the Reserve Bank envisaged and
released the 'Early Recognition of Financial Distress, Prompt Steps for Resolution
and Fair Recovery for Lenders: Framework for Revitalizing Distressed Assets in
the Economy' on January 30, 2014. The framework outlines a plan for tackling
distressed assets, covering early identification, quick restructuring and recovery.

8. Regulatory Mechanisms
The Framework outlines an early recognition of stress in all large value
accounts and their reporting to a Centralized repository at the RBI for
dissemination among all the concerned lenders for taking corrective actions
as per the broad guidelines given in the Framework. Accordingly, a Central
Repository of Information on Large Credits (CRILC) has been set up in April
2014 to collect, store, and disseminate credit data to lenders. Banks are
required to furnish credit information to CRILC on all their borrowers having
aggregate fund-based and non-fund based exposure of Rs. SO million and
above with them. Notified systemically important non-banking financial
companies (NBFC-51) and NBFC-Factors are also required to furnish such
information. CRILC's essential objective is to enable banks to take informed
credit decisions and early recognition of asset quality problems by reducing
information asymmetry.

9. Regulatory Mechanisms
Regulatory mechanisms for recovery - A bank begins a debt recovery process
when it seeks money it is owed. A bank takes recovery action for a number of
reasons, but the most common is when a customer fails to make loan
repayments. Debt recovery may include - Referring the matter to a specialist
debt recovery team within the bank, employing an external debt collection
agency to act on its behalf, selling property over which the bank holds
security, seeking a judgment from the courts to enforce the debts. In the
event, the bank is unable to recover the loan through its internal or external
collection teams it can initiate some of the steps mentioned below -

10. Regulatory Mechanisms
a. Troubled Banks largely turn to the Official Liquidator, a government-
appointed officer attached to the country's high courts, who administers
assets and oversees liquidation. However, this process of recovery is slow and
takes a minimum of five years and can take up to 10 years, by which point
there is virtually no value left in the asset. Further, the current legislation,
especially the Sick Industrial Companies Act of 1985 is geared towards
reviving companies, so appeals frequently follow a wind-up order results in
virtual paralysis.

11. Regulatory Mechanisms
b. Recovery through Debt Recovery Tribunals (DRTs) - RBI along with the
Government, has initiated several institutional measures to speed up
recovery of bank loans. Prior to 1993, banks had to take recourse to the long
legal route against defaulting borrowers, beginning with the filing of claims in
the courts. Many years were therefore spent in the judicial process before
banks could have any chance of recovery of their loans. Subsequently, Debt
Recovery Tribunals (DRTs) were established consequent to the passing of
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 to assist
the banks in the speedy adjudication of matters relating to recovery of NPAs
of Rs. 10 lakh and above. Appeals against orders passed by Debts Recovery
Tribunal (DRT) lie before Debts Recovery Appellate Tribunal (DRAT). Presently,
there are 33 DRTs and 5 DRATs functioning all over the country.

12. Regulatory Mechanisms
The recent amendments to DRT Act vide the Enforcement of Security Interest
and Recovery of Debts Laws (Amendment) Act, 2012 have been carried out to
improve the functioning of the DRTs, to prescribe time frame for filing of
pleadings, adjournments etc. and to give recognition and validity to the
settlements/compromises entered into between banks and borrowers.
Within a lesser period than a decade it was observed that DRTs could not give
desired results and a need was felt that banks should be given adequate
powers to recover their dues without intervention of Courts and Tribunals.
SARFAESI Act was brought into existence in 2002. It was indeed a good piece
of legislation which gives adequate strength to the Banks and Financial
Institutions to expedite recovery of their dues but clever defaulters found
their ways to move the Court / Debt Recovery Tribunal to delay the course of
recovery and entangle the banks with endless litigation.

13. Regulatory Mechanisms
The appeals by borrowers under the SARFAESI Act lead to an immediate stay
in the recovery process and stops banks from taking possession of assets of
defaulters and selling them. The slow recovery mechanism by DRTs has
contributed to the low ranking of India on the ease of doing business ratings.
However, in order to address this issue, the government is working on a
mechanism whereby debt recovery tribunals (DRTs) will hold only two
hearings within a defined time period - one for the interim order and the
other for the final order. With this, the banks may be able to make faster
recoveries from defaulting borrowers. Further, the government has also asked
the Department of Financial Services (DFS) to undertake computerization of
all DRTs. The objective is to ensure that the filing of pleadings, the filings of
documents, the filing of replies, is all done online with a provision of two
hearings in a defined period of time.

14. Regulatory Mechanisms
c. Banks also sell their loans to Asset Reconstruction Companies (ARCs). The
ARCS which are expected to play a pivotal role in recovering and
reconstructing the non-performing assets (NPAs) are proving to be
inadequate. The net worth of 15 operational ARCs in the country is only
around Rs 4,000 crore whereas stressed assets in the system run into lakhs of
crore rupees. ARCS are in dire need of incremental capital to be able to grow
and play a useful role in the sector. Investors may be interested in the
business, but are cautious on account of slow pace of judicial and
administrative environment. One of the issues which ARCS face is around
pricing of NPAs. Currently, the gap between price expectation of sellers and
bid price by the ARCS is too wide to be bridged, which is also evident from the
low success rate of auctions.

15. Regulatory Mechanisms
This also proves to be a hindrance while bringing in more investors willing to
invest in the security receipts (or SRs) being issued by the securitization and
reconstruction companies to raise funds for acquisition of NPAs. Discovery of
fair price for NPAs may definitely help in more deals going through auctions
and also generate interest from secondary investors like distress asset funds
which can participate via securitization and reconstruction companies.
Another issue is around discounts. Off late, the discount rate at which ARCs
are acquiring NPAs from the banks and Fls has decreased considerably. On the
recovery side, the performance is not very encouraging either. As on March
31, 2015, the average recovery rate (assets resolved as a per cent to assets
acquired) of securitization and reconstruction companies was at 31 per cent.

16. Regulatory Mechanisms
According to the central bank, one of the reasons for a dip in the average
recovery rate is due to the fact that substantial part of the assets under
management of securitization and reconstruction companies is acquired
recently. Then, there is the issue of the judicial process. An important factor
affecting recovery performance of securitization and reconstruction
companies, according to the RBI, is the delay in judicial process, be it under
SARFAESI Act or at the level of debt recovery tribunals.

17. Regulatory Mechanisms
The Government and the RBI have been constantly working towards
improving the banking sector in the country. Some of the work-in-progress
initiatives include-I.
1) RBI is exploring the possibility of limiting the number of lenders in a
consortium for better oversight of credit. In the prevailing scenario, Banks
lend to large projects in a consortium, which is generally led by the one with
the maximum exposure to the account. There have been cases of number of
lenders in a single consortium going up to 18. Typically, banks prefer
sanctioning big-ticket corporate loan in consortium format to diversify their
risk emanating out of large exposure. However, if too many (consortium)
members are there, credit monitoring becomes a problem. So that's why RBI
is considering to limit the number of members in a consortium.

18. Regulatory Mechanisms
2) Proposed Bankruptcy reform - While realizing the importance of having a
strong bankruptcy framework in improving the ease of doing business, the
Centre had constituted a Bankruptcy Law Reforms Committee to study the
corporate bankruptcy legal framework in India. Based on the report
submitted by the committee early this year, the GOl recently published a
proposal to overhaul an outdated and overburdened bankruptcy process with
a unified bankruptcy code. The proposal had called for public comments and
suggestions by Nov 19, after which the government will take a decision on the
report and introduce it in parliament.

19. Regulatory Mechanisms
The proposed bill aims to significantly speed up decisions on whether to save
or liquidate ailing companies, in a move to ensure higher recovery rates for
creditors - both key to fostering a modern credit market and increased
investment in India. Currently, lenders recover a paltry 20 percent of the
value of debt in 4.3 years on an average. If adopted, the changes would bring
in 'insolvency professionals' to run the resolution process, and set up creditor
committees to reach a verdict on an ailing company's future in up to 180
days, removing government involvement and ending decades of judicial
gridlock.

20. Regulatory Mechanisms
3) SEBI (Securities and Exchange Board of India) and the RBI have been
working together on rules to help lower bank NPAs. Recently, SEBI changed
the regulations to allow Indian banks to convert the debts of defaulting
publicly traded borrowers into equity. SEBI and RBI are also considering new
regulations covering willful defaulters" to impose restrictions on their ability
to raise funds and make acquisitions.
4) Setting up of Public debt management agency (PDMA) - At present, RBI
acts as the investment banker for the government and manages its debt. It is
proposed to form and an independent debt management agency to manage
government's borrowing in the future. In this regard, the government is
planning to create a shell PDMA through an executive order in few months.

21. Regulatory Mechanisms
The shell PDMA will acquire the requisite skills by undertaking dummy trading
in securities, working on new systems for primary issuance. The PDMA will
also consolidate government debt data which is now scattered over RBI and
several government agencies. The creation of the PDMA will enable RBI to
focus on its core function of monetary policy and regulating banks. This
agency is also expected to lower the government's borrowing costs eventually
and foster a liquid and efficient G-Secs market. The idea is also to resolve the
conflict of interests involved in RBI simultaneously targeting inflation by
calibrating interest rates and regulating as well as managing government
debt. After a year or so, PDMA would be handed over the advisory (middle
office) and the job of issuance of government securities (front office
function).

22. Regulatory Mechanisms
The government is also looking to implement some of the recommendations
of PJ Nayak Committee on Governance in banks. The core of the
recommendations in the PJ Nayak Committee report aims at reducing
government control of public sector banks in order to improve governance.
The committee has recommended the government to distance itself from
several bank governance functions. For this purpose it recommends that the
bank nationalization Acts of 1970 and 1980, together with the SBI Act and the
SB (Subsidiary Banks) Act, be repealed, all banks be incorporated under the
Companies Act, and a bank investment company (BIC) be constituted to
which the government would transfer its holdings in banks. The government's
powers should also be transferred to the BIC. It also suggested that the
process of board appointments needed to be professionalized.

23. Regulatory Mechanisms
Appointments of CEOs, inside directors and top executives of public sector
banks would be the responsibility of the Bank Boards Bureau constituting
three serving or retired bank chairmen, and the government should not be
involved in this decision in any way. Also, the committee has recommended
proportionate voting rights to all shareholders and reduction of governmental
shareholding to 40 percent.

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