Monday 7 September 2015

Joint Lenders’ Forum (JLF) | Concept, Issues, Solutions

What is it and Why is it in news?
  • JLF tackles stressed loans but progress is slow because of differences among creditors on how best to resolve them.
  • Under the stressed asset norms of RBI that took effect on 1 April 2014, as soon as interest payments on a loan are delayed by 60 days, a JLF comprising all lenders must be put in place
  • And within 45 days, the JLF must come up with a corrective action plan (CAP) and decide whether the debtor merely needs some hand-holding, or if the forum should opt for debt restructuring or recovery. 
  • The RBI Governor Raghuram Rajan may have thrown his weight behind the new debt restructuring mechanism – the joint lenders’ forum — introduced last year in place of the existing corporate debt restructuring (CDR) platform, but banks are far from convinced.
  • NPAs of all SCB are rising and profits falling due to a sharp rise in their provisioning, the debate on the joint lenders’ forum platform has only got shriller.  
  • Under the JLF framework for revitalising distressed assets in the economy, even before a loan account turns into an NPA, the new system helped identify the stress by segregating the accounts into three categories
    • Special Mention Accounts (SMA)
      • SMA-0 --> if <30 days + sign of incipient stress
      • SMA-1 --> loan overdue for 31-60 days 
      • SMA-2. --> if >60 days
Issues with JLF:
  • Takes long to resolve issues
  • Consensus elusive
  • Backtracking on decisions, by the banks
  • Lack of clarity and is slow on execution
  • Real problem with JLFs forum has been the fact that the committee is not really empowered to execute a decision
  • Healthy projects are getting adversely impacted.
  • The bias has remained for lenders in the JLF forum to restructure and extend the debt package rather than start recovery or rectification processes when the first default happens —these tend to be evaluated only when the initial restructuring fails, by when significant value in the business has been destroyed.
  • lenders taking the safest route of giving more time to borrowers for repayment
  • Big lenders don’t get cooperation from smaller ones and a lack of co-ordination leads to the failure in revive of projects
  • all JLF cases should be subject to credible independent scrutiny on expected future cash flows and where these do not support the current level of debt, SDR; recovery or rectification process need to start significantly earlier.
  • JLF as a construct should be retained as it is able to get the stakeholders on the table and make quick decisions
  • this may be painful in the short term, it is likely to yield much better results over the medium term for the banking system.
  • proper co-ordination between the small and large lenders to help in revival.  
  • more discussion needed
  • During his term, the RBI Governor has introduced flexibility for those who recognise and deal with stressed assets early, including 
    • an early warning database of large loans, 
    • JLF 
    • the Strategic Debt Restructuring process
    • the 5/25 mechanism — 
      • measures that are indicative of the flexibility that RBI has accorded to banks in dealing with the stressed asset problem in the absence of a functioning bankruptcy code.
This is, however, far from an optimal solution. 
  • For one, ARCs registered under the SARFAESI Act, which are expected to play a pivotal role in recovering and reconstructing NPAs and thereby resolve the sticky assets of the banking system, are clearly short of the task at hand. 
  • The networth of 15 operational ARCs in the country is only around Rs 4,000 crore whereas stressed assets in the system run into lakhs of crore rupees.


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