The year 2018 has been one of disruption for the banking industry. A tough loan default classification rule by the Reserve Bank of India (RBI), the out-of-the-blue IL&FS (Infrastructure Leasing and Financial Services) imbroglio and the spat between the government and the central bank have combined to make 2018 a year that the banking and financial services industry would like to quickly consign to the pages of history and move forward for good. RBI’s decision in February requiring banks to classify even a day’s delay in the payment of loan dues as default and report the same to the central bank set the stage for the industry to traverse a difficult road ahead. The move elicited strong reactions from the corporate world. Not surprisingly, banks saw a sharp rise in accounts classified in the first bucket of special mention accounts (SMA-0). An account is identified as an SMA-0 account if the payment is delayed even by one day. Reporting such accounts to the Central Repository for Information on Large Credits on a weekly basis becomes mandatory for accounts where outstanding loans are more than Rs. 5 crore.
For cases where the exposure goes beyond Rs. 2,000 crore, banks are expected to initiate rectification or restructuring procedures immediately. Banks have 180 days to complete this restructuring before they refer the account for insolvency proceedings. Predictably, banks and others alike raised ‘reputational risks’ involved in the rule with cascading consequences for future borrowings. Earlier, accounts overdue by 90 days were classified as NPAs (non-performing assets). Bankers would typically start following up on overdue payments only close to the 90-day mark so as to prevent an account being tagged as NPA.
Point of friction “A default is a default,” argued a top banker with a private lender. For him, the tendency to push repayment beyond the due date is an unhealthy practice allowed for long. The rule is turning out to be a huge friction point between the RBI and the rest. The fact of the matter, however, is that this rule has indeed managed to force defaulters in the corporate world to rush in to pay up. If the RBI is painted as a villain here, post-IL&FS episode has seen banks take up the role. Money has become scarce for many a finance company, placing in peril a host of small and medium enterprises.
The IL&FS story is a reiteration of the need for a well-oiled long-term debt market. Time and again, one keeps hearing on the requirement for a well-developed debt market. This remains a dream even today with many former development finance institutions converting themselves into commercial banks.