RBI issues new framework for resolution of bad loans
The Reserve Bank of India (RBI) today issued a new framework for resolution of stressed assets or bad loans. The new norms replaces all the earlier resolution plans such as the framework for revitalising distressed assets, corporate debt restructuring scheme, flexible structuring of existing long-term project loans, strategic debt restructuring scheme (SDR), change in ownership outside SDR, and scheme for sustainable structuring of stressed assets (S4A), and the joint lenders' forum with immediate effect. Notably, the Supreme Court in its earlier order on April 2, 2019 had quashed the previous norms.
According to the RBI statement, "hon’ble Supreme Court, vide its order dated April 2, 2019, had held the RBI circular dated February 12, 2018 on Resolution of Stressed Assets as ultra vires. In light of the same, the Statement on Framework for Resolution of Stressed Assets issued by the Governor on April 4, 2019 had clarified that the Reserve Bank of India will take necessary steps, including issuance of a revised circular, as may be necessary, for expeditious and effective resolution of stressed assets."
Accordingly, the RBI today announced the prudential framework for resolution of stressed assets by banks in the wake of the SC judgement. The fundamental principles underlying the regulatory approach for resolution of stressed assets are given below, according to the RBI.
— Zee Business (@ZeeBusiness) June 7, 2019
1. Early recognition and reporting of default in respect of large borrowers by banks, FIs and NBFCs;
2. Complete discretion to lenders with regard to design and implementation of resolution plans, in supersession of earlier resolution schemes (S4A, SDR, 5/25 etc.), subject to the specified timeline and independent credit evaluation;
3. A system of disincentives in the form of additional provisioning for delay in implementation of resolution plan or initiation of insolvency proceedings;
4. Withdrawal of asset classification dispensations on restructuring. Future upgrades to be contingent on a meaningful demonstration of satisfactory performance for a reasonable period;
6. For the purpose of restructuring, the definition of ‘financial difficulty’ to be aligned with the guidelines issued by the Basel Committee on Banking Supervision; and,
7. Signing of inter-creditor agreement (ICA) by all lenders to be mandatory, which will provide for a majority decision making criteria.
The current circular is expected that it "will sustain the improvements in credit culture that have been ushered in by the efforts of the government and the Reserve Bank of India so far and that it will go a long way in promoting a strong and resilient financial system in India."
Notably, the RBI stands committed to maintain and enhance the momentum of resolution of stressed assets and adherence to credit discipline.
Get Latest Business News, Stock Market Updates and Videos; Check your tax outgo through Income Tax Calculator and save money through our Personal Finance coverage. Check Business Breaking News Live on Zee Business Twitter and Facebook. Subscribe on YouTube.