Introduction:

Reserve Bank of India has come out with an updated guideline about resolving stressed assets on 7th June 2019. The new guideline on resolution of stressed asset is called Prudential Framework for Resolution of Stressed Assets Directions 2019. The directions have been issued in terms of the provisions of Section 35AA of the Banking Regulation Act, 1949, for initiation of insolvency proceedings against specific borrowers under the Insolvency and Bankruptcy Code, 2016 (IBC).

Body:

It is a set of guidelines to banks for tackling their stressed assets. Significance of the Prudential Framework is that it replaces the previous controversial/stringent and Supreme Court squashed stressed asset resolution guidelines published in February 2018.

Key highlights of the PFRSAD are:

• The central bank has made it voluntary for lenders to take defaulters to the bankruptcy court i.e. to use the Insolvency and Bankruptcy Code.
• The norms give lenders 30 days to start working on a resolution plan from the day of default.
• A lender will now have to set aside:
  • 20% more provisions if the plan is not implemented within 210 days from the date of default
  • 35% if the plan is not implemented within 365 days of default
• Besides, the new norms said that wherever necessary, the RBI will direct banks to start insolvency proceedings for specific defaults.
• The lenders may also choose to initiate legal proceedings for either insolvency or recovery.
• Meanwhile, the norms put in place penal provisions, for lenders, for resolution plans that are not implemented.
• The RBI circular also mandated signing of the inter-creditor agreement by all lenders.
• The RBI said that lenders must put in place board-approved policies for resolution of stressed assets.
• This must include the timelines for resolution.
• RBI said that it ideally expects lenders to initiate the process of implementing a resolution plan (RP) even before a default.
• During 30 days review period, lenders may decide on the resolution strategy.
• These include the nature of the RP and the approach for implementation of the RP.
• Here, the review period for defaulters of Rs.2,000 crore and above will start immediately.
• And that for defaulters between Rs. 1,500 crore and less than Rs. 2,000 crore will start only from 1 January 2020.
• The framework now applies to a larger universe of lenders including small banks and non-banking finance companies (NBFCs).
• This essentially means that the lenders will also have to follow the early stress recognition guidelines of RBI.
• These specify that borrowers must be categorized into special mention accounts based on their delay in repayment, which are:
  • Special mention account-0 (SMA-0) loans, where the repayment overdue is between 1-30 days
  • SMA-1 where the repayment overdue is between 31-60 days
  • SMA-2 where the repayment overdue is between 61-90 days

Conclusion:        

The slower-than-expected progress under the Insolvency and Bankruptcy Code (IBC) remains the key hurdle to the timely resolution of stressed assets. The Reserve Bank of India’s (RBI) revised framework for the resolution of stressed assets is credit positive, because it brings back the focus on the need for the timely resolution of such assets, and the build-up of loan loss provisioning against those assets.