The Reserve Bank of India, as a regulator of commercial banks, is monitoring and controlling the credit risk mitigation provisions/actions of banks with a view to ensuring a transparent and objective mechanism. The Regulator had accordingly introduced a comprehensive mechanism of ‘prudential norms on income recognition, asset classification and provisioning’, pertaining to advances in early nineties replacing the previously prevailing 'Health code' mechanism. The norms have been made more stringent over a period of time, linked to the time period of overdues/irregularities of the account. Starting from an initial specified past, a due period of four quarters was fixed way back in March 1993, it was brought down to two quarters in 1995 and thereafter with effect from March 2004 a uniform norm of 90 days for overdues was adopted.
The unprecedented situation arising out of the current pandemic led the central banks across countries to initiate proactive steps to deal with the emerging challenges. The Reserve Bank of India also exhibited a nimble footed pragmatic approach and came out with several measures to handle various issues arising from the covid-19 related situation. In addition to the moratorium on repayments, a special scheme was initiated to handle the covid-19 related stress accounts. This, inter alia, included sector wise assessment and relaxed financial parameters for 26 worst affected sectors. This was in addition to the continuation of a separate restructuring scheme for the MSME sector on relaxed terms and conditions. The overall approach indicated readiness of the regulator to respond with requisite relaxations. All this prompts us to look at the possibility of a fresh approach towards 'asset classification' norms themselves. As compared to the present, 'One Size Fits All' approach of 90 days overdue stipulation, due weightage may be required to be given to factors like availability of collateral security in a particular account.
Traditionally the commercial banks have been assessing the credit requirements of borrowers on the basis of the value of the assets created. After obtaining promoter's contribution/ margin from the borrower, bank funds are provided for stocks, debtors and creation of fixed assets, etc. Generally the borrower is expected to bring in 25% to 30% as margin. Over and above the same, as a part of credit risk mitigation, normally the Banks obtain collateral securities in the shape of mortgage or charging of fixed assets like land and building, plant and machinery and residential properties leaving aside cases of very small/micro enterprises cases. Most often, in all small to mid-sized cases, the borrower is encouraged/ insisted upon to provide collateral securities to fall back upon. Typically small and medium sized borrowers provide such securities which exhibit their commitment, additional stake and the proverbial 'skin in the game' of business. Such entrepreneurs particularly under the SME sector generally do their utmost to run the business successfully so as to preserve their collateral, which may include ancestral properties too. On the other hand in the case of large accounts, comparatively the availability of collaterals is generally far less.
The asset classification norms of the RBI at present stipulate a criteria of 90 days overdue across various borrowers irrespective of the value of collateral available in the account. This apparently creates an anomalous situation whereby a borrower 'A ' who has provided to the bank sufficient collaterals by way of self /group owned properties is treated at par with another borrower 'B' who has not provided any such collaterals. This puts the borrower 'A' in a comparative disadvantage, as both are equally likely to be categorized as NPA on crossing the 90 day overdue threshold. This happens despite a stronger commitment/ skin in the game in the case of Promotor A and an obviously better realizable value of the business to recover the dues. This extra collateral should be taken as providing the lender requisite comfort to take additional credit risk for such borrowers (as ‘A’) who have provided collaterals but banks are generally equally reluctant to provide additional funding support to NPA classified borrowers.
Equity demands that, in the event of any distress, the borrower with higher collaterals should be entitled to a better treatment by bankers than the one with no collaterals. This can be in the form of availability of funds and better terms. This will duly incentivize the promoters with greater commitment and stake by way of collaterals to get a better chance of Revival and Sustenance in difficult times and thriving in the long run. Treating all borrowers at par irrespective of the collaterals offered, needs to be thus reviewed and norms for asset classification should, therefore, take due cognizance of the inherent strength /collaterals rather than merely looking at the payment record of 90 days, etc.
The prudential guidelines on asset classification of advances were implemented by the RBI in a phased manner. Over this time period the economy has evolved and a new set of circumstances have emerged where sustenance and continuity of business has assumed greater importance.
Drastic situations require prompt and strong necessary solutions and a proactive relook at NPA classification norms will go a long way - and therefore, perhaps, also of the country in the long run - in easing the situation particularly for the SME borrowers in terms of their wellbeing.
