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Moody’s gives a thumbs-up to RBI’s new guidelines on bad loans

Nevertheless, the slower-than-expected progress under the IBC remains the key hurdle to the timely resolution of stressed assets, Moody’s added
New Delhi: Even as Moody’s Investors Service has rated the Reserve Bank of India’s (RBI) new prudential framework for stressed asset resolution as ‘credit positive,’ it has flagged the slower-than-expected progress of resolution under Insolvency and Bankruptcy Code (IBC) as a key hurdle. “The RBI’s revised framework for the resolution of stressed assets is credit positive because it brings back the focus on the need for the timely resolution of such assets, and the buildup of loan loss provisioning against those assets,” Moody’s Investors Service VP Financial Institutions Group Alka Anbarasu said.

Extension of circular to NBFCs a positive step

Moody’s lauded the decision to extend the circular to non-bank finance companies (NBFCs), saying that it will help align the loan loss provisioning norms for the large stressed accounts of NBFCs with commercial banks. “Nevertheless, the slower-than-expected progress under the Insolvency and Bankruptcy Code (IBC) remains the key hurdle to the timely resolution of stressed assets. The cleanup of the bank’s balance sheets could therefore still take another two to three years,” Moody’s said.

The backdrop

The RBI issued a prudential framework for resolution of stressed assets last week after the Supreme Court nullified the February 12 circular. The new guidelines give lenders 30 days to review an account before labelling it as a non-performing asset (NPA) in case of default. The previous circular mandated the lenders to start the resolution process even if there was one day default.