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RBI revises framework to build a strong and resilient finance system

Expeditious resolution of stressed assets


Expeditious resolution of stressed assets


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The Reserve Bank of India (RBI) has issued a revised framework for resolving stressed assets by offering lenders a 30-day period to label an account of a Non-Performing Asset (NPA).

But has withdrawn all other resolution methods, according to a posting on RBI website on 7 June 2019.

It is expected that the current circular will sustain the improvements in credit culture that have been ushered in by the efforts of the Government and RBI so far and that it will go a long way in promoting a strong and resilient financial system in India.

As articulated by the Governor in the Statement of 4 April 2019, the RBI stands committed to maintain and enhance the momentum of resolution of stressed assets and adherence to credit discipline.

The RBI has placed on its website the prudential framework for resolution of stressed assets by banks in the wake of the judgement of the Supreme Court of India.

The Supreme Court, vide its order dated 2 April 2019, had held the RBI circular dated 12 February 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 4 April 2019 had clarified that the RBI will take necessary steps, including issuance of a revised circular, as may be necessary, for expeditious and effective resolution of stressed assets.

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

Early recognition and reporting of default in respect of large borrowers by banks, FIs and NBFCs;

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;

Withdrawal of asset classification dispensations on restructuring. Future upgrades to be contingent on a meaningful demonstration of satisfactory performance for a reasonable period;

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,

Signing of inter-creditor agreement (ICA) by all lenders to be mandatory, which will provide for a majority decision making criteria.

Notwithstanding anything contained in this framework, wherever necessary, RBI will issue directions to banks for initiation of insolvency proceedings against borrowers for specific defaults so that the momentum towards effective resolution remains uncompromised.

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