At the meeting of the Bank chiefs on Friday the 23rd June ’17, RBI demanded a huge rise in the provisions on Loans, which are being referred to Bankruptcy courts. Possibly this is likely to end up with additional expenditure of Rs. 50,000 crores on the bankers.
The rule states that:
- At least 50% of the amount of Loans, referred to Insolvency process, be reserved as provision. Currently a provision at 30-40 per cent is being made by banks on these loans.
- Cases wherein there is no progress on negotiations, within the stipulated period, and are pushed toward liquidation, the Regulator added that 100% provision should be made.
- Also cases which are referred to NCLT (National Company Law Tribunal), under the IBC (Insolvency and Bankruptcy Code), RBI advised that 100% provision on unsecured Loan be made.
- Bankers are of the opinion that since the Bankruptcy Code is still in the offing and is not tested
- Most of the cases may not get resolved within the stipulated time and thus would pave way for liquidation.
An RBI circular on revised provisioning norms for those cases which are accepted for resolution under IBC is being issued separately
Note: The latest RBI guidelines reads that if a substandard account which requires 15% provision is referred to NCLT, this will jump to 50% for a secured loan and 100% if it is unsecured. At the end, if there is a deadlock in discussions between the lenders and the borrowers, and if there is instruction from NCLT for liquidation of assets, RBI insists that 100% provision on such assets is necessary.