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RBI issues revised circular on resolution of stressed loans

The Supreme Court had earlier quashed the RBI circular on stressed loan recognition and resolution of large borrowers over Rs 2,000 crore.

RBI issues revised circular on resolution of stressed loans

New Delhi: The Reserve Bank of India on Friday placed on its website the prudential framework for resolution of stressed assets by banks in the wake of the judgement of the Supreme Court.

The Supreme Court had earlier quashed the RBI circular on stressed loan recognition and resolution of large borrowers over Rs 2,000 crore. The apex court had termed the circular, issued on February 12, 2018, as ultra vires, or beyond the legal authority, to the provisions of the Banking Regulations Act and the RBI Act.

As per the revised circular, the regulatory approach for resolution of stressed assets are as under:

  •     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.

“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 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,” RBI said.