- The Reserve Bank of India on June 6, 2019 issued a new ‘Prudential Framework for Resolution of Stressed Assets’ for resolution of bad loans.
- The new norms will replace 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), 5/25 with immediate effect.
New features
- The new resolution has offered a 30-day gap for stress recognition instead of the one-day default earlier.
- Lenders will have complete discretion with regard to the design and implementation of resolution plans, subject to the specified timeline and independent credit evaluation.
- Lenders may recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA).
- In case a borrower is reported to be in default, the lenders should undertake a prima facie review of the account within 30 days from the day of default.
- If multiple lenders are involved, then RBI has said that all the lenders must enter into an inter-creditor agreement during the review period, to provide for ground rules for finalisation and implementation of the resolution plan.
- Lenders are free to initiate legal proceedings for insolvency or recovery. These directions have come into force with immediate effect.
- Lenders will have 180 days to implement a resolution plan after the 30-day review period from the date of default. Beyond 180 days, the banks can either resolve it through the insolvency courts or even outside.
- Lenders will have to make 20% additional provisioning if they miss the 180-day deadline on resolution.
- Another 15% should be made if no resolution process can be figured out for more than a year.
Background
- The 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 Reserve Bank has today placed on its website the prudential framework for resolution of stressed assets by banks in the wake of the judgement of the Hon’ble Supreme Court of India.
