Indian banks have requested the RBI to extend the timeline for declaring an account as wilful defaulter from 6 months to 12 months after it becomes non-performing. This has implications for banks, creditors, and investors.
Analysis for Layman
Banks have to follow RBI rules on when they can term a defaulting borrower as a wilful defaulter. This tag makes it difficult for borrowers to access credit. Banks want more time to complete due process before classifying accounts as wilful defaulters based on new guidelines requiring in-person hearings.
The banks’ demand signals their intent to pursue fair practices and not hastily tag accounts as wilful defaulters. An extended timeline allows genuine businesses facing external adversities more leeway to resolve defaults collaboratively with lenders before facing the wilful defaulter stigma.
However, extra time also means banks must contend with extended uncertainty regarding potential recoveries from weak accounts. This necessitates higher loan loss provisions and capital locking in, hurting profitability unless banks speed up haircuts/ settlements.
The RBI must balance both aspects while finalizing suitable timelines. The focus should expand from just avoiding premature wilful defaulter tags to also ensuring banks don’t drag processes allowing unviable accounts to guzzle repayable resources indefinitely.
Impact on Retail Investors
For retail investors in bank stocks, near-term earnings may remain pressured due to higher credit costs from potential delays in resolving distressed corporate accounts. This along with rising bond yields exerting treasury losses can cap upside despite improved credit growth and retail lending for banks.
However, strengthened corporate health checks before wilful defaulter declaration may aid better risk pricing subsequently. Retail investors should analyze provisioning buffers, exposure concentrations and GNPA guidance while investing in banking names amid asset quality uncertainty.
Impact on Industries
The rule impacts sectors witnessing higher delinquencies like power, infrastructure and metals due to economic slowdown. Entities in such industries get added time for loan recasts before their credit access worsens significantly under wilful defaulter status.
Service industries like banking itself however sees extended uncertainty over recoveries necessitating greater capital buffers impacting growth prospects and investor sentiment.
Long Term Benefits and Negatives
In the long run, conservative timelines and fair play may improve India’s credit culture if genuine businesses utilize the leeway responsibly to resolve defaults. This can promote better underwriting practices subsequently.
However, recurrent extensions of resolution timeframes risk moral hazard. Market discipline gets undermined if unviable firms recurrently avail leniency to evergreen loans rather than exiting quickly. This can constrain long term credit growth and productivity.
Short Term Benefits and Negatives
Near term benefits include avoiding knee-jerk wilful defaulter tags, enabling struggling but viable corporates to raise operating resources by reworking debt with existing lenders. This provides short term liquidity support.
However, uncertainty around ultimate losses remains elevated for banks in the interim requiring higher provisions impacting profitability. Dragging failed restructurings also ties up bank capital lengthening credit turnarounds.
Companies that will Gain
Companies in default may gain like Suzlon Energy and JSPL through co-operative debt recasts. State-owned banks may see lower credit costs if extensions enable better recoveries like SBI, PNB. More time to classify defaulters as wilful may aid sentiments.
Companies that will Lose
Private banks like ICICI and Axis with higher impaired loans may see greater earnings uncertainty from extended resolutions. Power and metal companies loans may stay under stress for longer negatively impacting lenders.
Balancing financial stability risks and supporting economic revival is critical for RBI while framing pragmatic timelines. The focus should go beyond just avoiding premature ‘wilful defaulter’ labeling to ensuring fair treatment of genuine distressed accounts co-exist with holding willful defaulters accountable.
The banks’ request signals intent to facilitate cooperative debt restructuring where possible by avoiding hurried ‘wilful defaulter’ declarations. However, extended uncertainties can negatively impact lending sector’s profitability and risk appetite in the interim requiring monitoring by exposed investors.
Tiwari, D. Lenders Again Move RBI on Wilful Defaulter Tag for A/Cs. The Economic Times.