RBI issues revised circular to deal with stressed assets

Resolution process commences only after 30 days of default

MUMBAI: The Reserve Bank of India (RBI) on Friday (June 7) announced fresh guidelines in place of the infamous February 12 circular that was quashed by the Supreme Court in April for being ‘ultra vires’ as it sought lenders to initiate resolution process of loans worth Rs2000 crore or more from the first day of default.

The new guidelines allow the lenders 30 days’ time for the loans to be called ‘in default’ thus giving the borrowers more breathing time.

The new NPA norms replace all the previous models, the central bank said. As per the new framework, during the review period of 30 days, lenders have the freedom to decide on the resolution strategy and the approach for implementation of the resolution plan (RP).

The RBI Governor, Shaktikanta Das, had on Thursday promised that the new regulations to replace the tougher February 12 circular would come any time from then.

In the earlier circular that was quashed by SC, RBI had said, “Lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts.”

The February 12 circular had invited in protests from the corporate world that argued the time allowed by RBI was too short to address the situation.

The fundamental principles underlying the regulatory approach for resolution of stressed assets are as under:

  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;
  • A system of disincentives in the form of additional provisioning for delay in implementation of resolution plan or initiation of insolvency proceedings;
  1. Withdrawal of asset classification dispensations on restructuring. Future upgrades to be contingent on a meaningful demonstration of satisfactory performance for a reasonable period;
  2. 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,
  3. Signing of inter-creditor agreement (ICA) by all lenders to be mandatory, which will provide for a majority decision making criteria.

“Resolution plans shall provide for payment not less than the liquidation value due to the dissenting lenders,” stated RBI in its latest framework.


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