Skip to main content

RBI scotches speculation on easing default norms

By
RBI scotches speculation on easing default norms 
Mint Street has virtually scotched speculation regarding the easing of norms on default classification, saying that the new rules seek to change the credit culture in a country where even big companies that can repay on time tend to game the system to earn additional income. 
Complaints that the timeline given to regularise a defaulter’s account is insufficient are misplaced and the effort is to ensure that arbitrage between different markets are eliminated, Reserve Bank of India (RBI) Deputy Governor NS Vishwanathan said Wednesday. 
“It is a behaviour change in repayment of credit that has to come about," Vishwanathan told graduating students at the National Institute of Bank Management. “The data show that a large number of borrowers, even some highly rated ones, have failed on the 1-day default norm. This has got to change." On February 12, the central bank came up with a tight set of norms for the recognition of default, seeking to put in place a system to resolve such delinquencies.
It scrapped all the existing programmes for restructuring, such as Corporate Debt Restructuring and other plans. It made the bankruptcy proceedings under the Insolvency and Bankruptcy Code the sole law for resolving defaults. Banks were mandated to treat an account as a defaulter from the day 1 when it missed payments, withdrawing the earlier latitude of 90 days. 
This idea is to nudge lenders and borrowers to take timely corrective action so that the deterioration in the asset quality is avoided to the extent possible," Vishwanathan said. “At the same time, with defaults being reported to a central database, which is accessible to all banks, the credit discipline is expected to further improve.” 
The mandate to declare the default the very next day after the defined payment schedule would also correct a long overdue arbitrage between the loans and the bond markets.“If a borrower delays coupon and principal payment on a corporate bond even for one day, the market would penalise the borrower heavily — the rating would be downgraded, the yields on the bonds would shoot up, cost of further financing would increase, suits would be filed by investors," said Vishwanathan. “So far, defaults in bank borrowings have not attracted similar reactions." Making banks come up with a resolution plan within 180 days is to ensure that banks are proactive. 
One has to note that ‘default’ in payment is a lagging, not leading, indicator of financial stress of a borrower and the framework provides 180 days after a default to put in place a resolution plan," he said. “Lenders need to be proactive in monitoring their borrowers and be able to identify financial stress, using a combination of leading indicators." The criticism that the timing was not right for such tightening of norms is misplaced, he said. 
“The search for that perfect time for a long overdue reform can become a never-ending exercise," said Vishwanathan. “I am not sure whether the protagonists of the view that the reform was untimely know when the right time is other than that it is some time in the future!.” 
The Economic Times, New Delhi, 19th April 2018

Comments

Post a Comment

Popular posts from this blog

RBI deputy governor cautions fintech platform lenders on privacy concerns during loan recovery

By
  India's digital lending infrastructure has made the loan sanctioning system online. Yet, loan recovery still needs a “feet on the street” approach, Swaminathan J, deputy governor of the Reserve Bank of India, said at a media event on Tuesday, September 2, according to news agency ANI.According to the ANI report, the deputy governor flagged that fintech operators in the digital lending segment are giving out loans to customers with poor credit profiles and later using aggressive recovery tactics.“While loan sanctioning and disbursement have become increasingly digital, effective collection and recovery still require a 'feet on the street' and empathetic approach. Many fintech platforms operate on a business model that involves extending small-value loans to customers often with poor credit profiles,” Swaminathan J said.   Fintech platforms' business models The central bank deputy governor highlighted that many fintech platforms' business models involve providing sm
Post a Comment
Read more

Credit card spending growth declines on RBI gaze, stress build-up

By
  Credit card spends have further slowed down to 16.6 per cent in the current financial year (FY25), following the Reserve Bank of India’s tightening of unsecured lending norms and rising delinquencies, and increased stress in the portfolio.Typically, during the festival season (September–December), credit card spends peak as several credit card-issuing banks offer discounts and cashbacks on e-commerce and other platforms. This is a reversal of trend in the past three financial years stretching to FY21 due to RBI’s restrictions.In the previous financial year (FY24), credit card spends rose by 27.8 per cent, but were low compared to FY23 which surged by 47.5 per cent. In FY22, the spending increased 54.1 per cent, according to data compiled by Macquarie Research.ICICI Bank recorded 4.4 per cent gross credit losses in its FY24 credit card portfolio as against 3.2 per cent year-on-year. SBI Cards’ credit losses in the segment stood at 7.4 per cent in FY24 and 6.2 per cent in FY23, the rep
Post a Comment
Read more

India can't rely on wealthy to drive growth: Ex-RBI Dy Guv Viral Acharya

By
  India can’t rely on wealthy individuals to drive growth and expect the overall economy to improve, Viral Acharya, former deputy governor of the Reserve Bank of India (RBI) said on Monday.Acharya, who is the C V Starr Professor of Economics in the Department of Finance at New York University’s Stern School of Business (NYU-Stern), said after the Covid-19 pandemic, rural consumption and investments have weakened.We can’t be pumping our growth through the rich and expect that the economy as a whole will do better,” he said while speaking at an event organised by Elara Capital here.f there has to be a trickle-down, it should have actually happened by now,” Acharya said, adding that when the rich keep getting wealthier and wealthier, they have a savings problem.   “The bank account keeps getting bigger, hence they look for financial assets to invest in. India is closed, so our money can't go outside India that easily. So, it has to chase the limited financial assets in the country and
Post a Comment
Read more