RBI Monetary Policy: Central Bank Aims To Bring In Tougher NPA Provisioning Norms
The RBI is changing how banks calculate loan loss provisions and will roll out a framework for stressed asset securitisation.
India’s banking regulator introduced a framework for securitisation of stressed assets and has proposed changes to how banks calculate loan-loss provisions.
Reserve Bank of India Shaktikanta Das, in this address after the Monetary Policy Committee meeting, announced a total of four new regulatory measures:
Issuance of a discussion paper on the expected loss approach for loan loss provisioning.
Introduction of a framework for the securitisation of stressed assets.
A proposal for regulation of offline payment aggregators.
The issuance of guidelines and criteria for rural regional banks to be eligible to offer internet banking facilities to their customers.
The expected loan loss approach is a “more prudent and forward looking approach... which requires banks to make provisions based on an assessment of probable losses”, Das said.
“The inadequacy of the incurred loss approach for provisioning by banks and its procyclicality, which amplified the downturn following the financial crisis of 2007-09, has been extensively documented,” the RBI said in a statement.
The proposed move, Das said, is a step towards converging with globally accepted norms and the RBI plans to issue a discussion paper shortly on the different aspects of the transition.
“Loan loss provisioning based on expected loss approach, if implemented, could generally serve to upfront provisions to some extent,” Yes Securities said in a statement. Lenders that run business models where the steady state bad loan ratios are higher but the loss given default is lower—due to sound collateral—may see some decline in actual provision levels, it said.
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Securitisation Of Stressed Assets
The framework for the securitisation of stressed assets, the governor said, will exist in addition to the asset reconstruction company route and will be similar to that for securitisation of standard assets.
“This will provide an alternative mechanism for securitisation of [non-performing assets], in addition to the existing ARC route,” Das said.
This measure, when introduced, will likely allow investors other than ARCs to participate in securitisations of stressed assets and will result in deepening of the market for NPAs, said L Viswanathan, partner, Cyril Amarchand Mangaldas. “This will also allow participation by newer pools of capital and allow regulated entities to divest their assets to such players in order to manage their balance sheets.
While the central bank had issued guidelines to regulate payment aggregators in March 2020, the current rules only apply to online payment aggregators. The RBI has now proposed to extend these rules to offline payment aggregators as well and the move is “expected to bring in regulatory synergy and convergence on data standards”, Das said.
Regional Rural Banks
Das also said the RBI would issue a fresh set of criteria that qualify regional rural banks to offer internet banking to customers.
“Keeping in view the need to promote the spread of digital banking in rural areas, these criteria are being rationalised. The revised guidelines will be issued separately,” he said.
The announcements came after the Monetary Policy Committee’s meeting in which the panel decided to raise the repo rate by 50 basis points to quell inflation. “The MPC also decided by a majority of five out of six members to remain focused on withdrawal of accommodation to ensure that inflation remains within the target,” Das said in his address.