What are the implications of the new RBI circular on bad assets for investors in banking stocks?

The RBI new norms announced recently need to be understood with reference to the original February 12^th circular put up by the RBI. What the original circular said was that if any corporate borrower having a borrowing of more than Rs.2000 crore defaulted on even in a single payment then the company will be directly referred to debt resolution with a time availability of 180 days. During this period, the process of resolution will have to be automatically initiated. When the original circular was introduced by the RBI in February, there were complaints from banks and from borrowers saying that it was too harsh and also not practical.

The recent modified circular gives some additional leeway to the banks and to the borrowers. Now when a borrower above the threshold of Rs.2000 crore defaults on a loan then there will be a 30 days cooling period to resolve the issue. If the issue does not get sorted out in 30 days then on the next day it automatically goes into the 180 day resolution period. If at the end of the 180 days resolution period, there is still no resolution possible, then the company gets automatically gets referred to NCLT (for liquidation and distribution of proceeds of assets to creditors). There is one more option. If the issue cannot be resolved in 180 days and the bank and the borrowers need more time then the period can be extended up to 365 days but the banks will have to make a higher provision in their books during this period.

Moody’s has mentioned that this move by the RBI will be positive for banks and for borrowers as it gives enough time for both of them to explore and evaluate multiple options before going into NCLT. This move is seen as positive for banks and especially banks with large corporate loan books like SBI, ICICI Bank and BOB should benefit from this move.