Court directs RBI on ultra vires!

RBI places Prudential Framework

For Resolution of Stressed Assets!

RBI to direct banks

for initiation of insolvency!

Hon’ble 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. 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; 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;

2: 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.

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.

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

By giving their reaction over the RBI initiatives, Rajat Bahl, Chief Analytical Officer & Head Financial Institutions-BRW & Praveen Pardeshi, Research Analyst- BRW says, These fresh norms are applicable to all the lenders including scheduled commercial banks, All-India financial institutions (NHB, EXIM, NABARD and SIDBI), Small Finance Banks, Systemically Important Non-Deposit taking Non-Banking Financial Companies (NBFC-ND-SI) and Deposit taking Non-Banking Financial Companies (NBFC-D) as against the earlier applicability on scheduled commercial banks and All-India financial institutions only, bringing in a level playing field.

Also, the new circular has struck down the earlier requirement of 100% approval from creditors for implementation of the resolution to 75% required approval, thereby increasing the chances of successful implementation of RP within the stipulated timeline of 180 days.

Against earlier norm of implementation of RP on a single day default, the new norm allows lenders to review the accounts within 30 days from the default, imbibing a smoother transition while ensuring better credit discipline.

Reduction from Rs 2000 crores threshold to Rs 1500 crores with a reference date of Jan 1, 2020, is the first step towards covering all the stressed assets, laying a clear roadmap to ensure better resolution of stressed assets.