Talking Point: ‘Rise in one-day default norms breach worrisome’

Amidst rising bad loans, which have crossed 10 per cent of the system, the Reserve Bank had on February 12 released a revised framework on bad loan resolution, under which banks will have to disclose defaults even if the interest repayment is overdue by just one day and have to a resolution plan in place within 180 days. 

Failing to find a resolution within this stipulated time, the defaulting company will have to be referred to insolvency courts as the RBI had abolished all the extant debt resolutions mechanisms. 

“Data show that a large number of borrowers, even some highly-rated ones, have failed on the one-day default norm. This has to change. If borrowers fail to pay on the due date because of a cash flow problem, banks should see that as an early warning indicator warranting immediate action,” Vishwanathan said at an event here.  

The statement comes amidst media reports that government has been pressing the Mint Road to relax the stringent new NPA reporting norms by relaxing the one-day default reporting norms to 30 days as it worries that with the new norms, many more companies, especially small and medium units, will end up at NCLTs, crippling the economy.

The deputy governor, who is in-charge of the banking regulations department, also said banks should warn their customers that one-day default will lead them to the watch list for resolution. 

“Borrowers, too, should realise that they have to meet payment obligations and it is no more sufficient to pay up only by 60/90 days past due date,” he said. If borrowers, with ability to pay on due date, delay routinely or because they see other arbitrage options, it must change, he said. The revised framework tries to reduce the arbitrage options that borrowers are currently enjoying while raising funds through bank borrowing compared to raising funds from the market. 

“If a borrower delays coupon/principal payment on a corporate bond even for a 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 etc,” he said.