Bad loan mess: RBI's new norms to speed up resolution of stressed assets

Mumbai: RBI’s new norms for overhauling the existing mechanism to deal with bad loans – bringing them line with Insolvency and Bankruptcy Code (IBC) – will help ensure speedy resolution of stressed assets in the banking system, officials said on Tuesday. The revised framework has specified norms for “early identification” of stressed assets, timelines for implementation of resolution plans, and a penalty on banks for failing to adhere to the prescribed timelines. The latest notification by Reserve Bank of India (RBI) has also withdrawn the existing mechanism which included Corporate Debt Restructuring Scheme, Strategic Debt Restructuring Scheme (SDR), Scheme for Sustainable Structuring of Stressed Assets (S4A). The Joint Lenders’ Forum (JLF) as an institutional mechanism for resolution of stressed accounts also stands discontinued, it said, adding that “all accounts, including such accounts where any of the schemes have been invoked but not yet implemented, shall be governed by the revised framework”. Commenting on the RBI move, Financial Services Secretary Rajiv Kumar told PTI that last night’s notification is a “wake up call” for defaulters. “The government is determined to clean up things in one go and not defer it. It is a more transparent system for resolution,” he said. [caption id=“attachment_4339499” align=“alignleft” width=“380”] RBI logo. AFP image.[/caption] The RBI’s decision would not have much impact on provisioning norms for banks, he said. Last year, the government had given more powers to the RBI to push banks to deal with non-performing assets (NPAs) or bad loans. The gross NPAs of public sector and private sector banks as on 30 September, 2017 were Rs 7,33,974 crore, Rs 1,02,808 crore respectively. “In view of the enactment of the IBC, it has been decided to substitute the existing guidelines with a harmonised and simplified generic framework for resolution of stressed assets,” the RBI said in a notification late Monday evening. As per the revised guidelines, the banks will be required to identify incipient stress in loan accounts, immediately on default, by classifying stressed assets as special mention accounts (SMAs) depending upon the period of default. Classification of SMA would depend on the number of days (1-90) for which principal or interest have remained overdue. “As soon as there is a default in the borrower entity’s account with any lender, all lenders - singly or jointly - shall initiate steps to cure the default,” RBI said. The resolution plan (RP) may involve any actions/plans/reorganisation including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, sale of the exposures to other entities / investors, change in ownership, or restructuring. The notification said that if a resolution plan in respect of large accounts is not implemented as per the timelines specified, lenders will be required to file insolvency application, singly or jointly, under the IBC, 2016, within 15 days from the expiry of the specified timeline. All lenders are required to submit report to Central Repository of Information on Large Credits (CRILC) on a monthly basis effective 1 April, 2018. In addition, the lenders shall report to CRILC, all borrower entities in default (with aggregate exposure of Rs 5 crore and above), on a weekly basis, at the close of business on every Friday, or the preceding working day if Friday happens to be a holiday. The first such weekly report shall be submitted for the week ending 23 February, 2018, the notification said. The new guidelines have specified framework for early identification and reporting of stressed assets. In respect of accounts with aggregate exposure of the lenders at Rs 2,000 crore and above, on or after 1 March, 2018 (reference date), resolution plan RP should be implemented within 180 days. “If in default after the reference date, then 180 days from the date of first such default,” the notification said.