Effort continues against stress in banking system

As part of its ongoing putsch against stress in the banking system, the Reserve Bank of India (RBI) issued guidelines on sale of stressed assets by banks on 1 September. The guidelines continue the RBI’s various efforts since 2014 to put in place a regulatory framework to identify and tackle stress in the banking system before loans are classified as non-performing assets (NPAs), and clean up banks’ balance sheets. The guidelines are detailed and cover a vast swathe including when stressed assets should be sold, valuation, investment in security receipts by selling banks, and mode of sale (including a right of first refusal to be offered by the selling bank).

The guidelines require banks to have a board approved policy on the sale of stressed assets to securitization companies (SCs) and reconstruction companies (RCs). The policy should cover the nature of financial assets to be sold, procedure for sale, valuation methodology (with the intent that the realizable value of the asset is reasonably estimated), and decision making in respect of such sale. The guidelines emphasize early identification of stressed assets for sale so as to achieve a better price for the selling bank, and require the head office of the selling bank to be involved in this process.

At least once a year, banks must identify and list assets for sale to SCs and RCs. To enable better price discovery, the guidelines also allow banks to offer such assets for sale to other banks and non-banking financial companies. To press banks to operationalize this mechanism, the guidelines require banks’ boards to consider for sale all assets classified as “doubtful” in their books and exceeding a particular threshold.