RBI tightens Rules for joint lenders’ forum rules

The Reserve Bank of India (RBI) on May, 5 2017 moved to make the joint lenders’ forum (JLF) more effective, directing banks to not break any rules and to meet all deadlines. The regulator said any breach of rules would attract a monetary penalty. JLFs are meetings at which banks attempt to red-flag stress early and work to try and keep it in check by putting in place a corrective action plan (CAP). Although the mechanism has been place for some time now, decisions have been few and far between thanks to disagreements between lenders.

According to RBI’s so-called prompt corrective action (PCA) framework, banks are assessed on three parameters: capital ratios, asset quality and profitability. Failure to meet any of these norms could invite RBI action on these lenders, which could include strictures on lending and branch expansion, change in management and reduction in assets. RBI has also defined two more risk thresholds—when the capital adequacy ratio falls below 7.75% and below 6.25%. Each higher threshold brings more strictures such as stopping branch expansion, higher provisions and even restrictions on management compensation and directors’ fees. It would be binding on all the others and must be implemented without any additional conditionalities. If a lender wanted to exit, it could do so by resorting to the substitution option but if it failed to exit within the given time, it would need to go along with the decision taken.

JLFs inefficiency basically stems out from the disagreements between lenders.The entire model of JLF is based on the premise that collective action of banks against a borrower for recovery. However, in reality, different lenders have different levels of comfort or discomfort, based on the exposure, collateral, etc. Many lenders have also complained about the lack of transparency in JLF.

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