Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.This is an entirely free service. No payments are to be made.
As per an article in Economic Times, the Reserve Bank of India (RBI) has empowered banks to bring ownership changes of borrowing entities under stress. Banks can now change the management of companies that are in trouble because of operational or managerial inefficiency of their promoter.
The drive behind this move came from the issue of rising non-performing assets (NPAs) in Indian banks. At 39 listed banks, gross NPAs rose to Rs 3.21 trillion as of June 2015 from Rs 2.51 trillion a year earlier. About 40% of loan accounts restructured between 2011 and 2014 were found out to be bad.
To eliminate this, the RBI has come up with a stringent policy to bring defaulters under check. Banks are granted power to change the ownership of ill-behaved corporate. Furthermore, two of the country's largest lenders-State Bank of India (SBI) and ICICI Bank will play a key role in turning around a company after its default.
Till now, banks were allowed to exercise such powers only after a stressed loan had been restructured. Borrowers were given a second chance to turn around. All of this came under the purview of the strategic debt restructuring (SDR) scheme. However, no major developments were seen by its application. And so for now, a circular has been passed to upgrade this scheme and hold the reins tighter.
From now on, banks can change the ownership by way of sale to a new promoter by invocation of pledged shares or conversion of debt of the borrower into equity. This can be exercised even before the loan account turns 'bad'. This will provide room for banks to act well before an account becomes NPA. Moreover, the loans where the ownership change is enforced can be treated as 'standard assets' by banks. This will be more beneficial as no provisioning will be required. In turn, this will help lenders save their capital.
Moving on, the RBI has formed a committee of bankers-joint lenders forum (JLF). It will design corrective actions soon after a default. Also, they will look into loans that are classified as 'doubtful'.
With more strings attached, borrowers will hopefully aim to allocate capital more efficiently. While this initiative by the RBI may not produce immediate results, it could go a long way in strengthening India's banking system over the long run.
For information on how to pick stocks that have the potential to deliver big returns, download our special report now!