Banks seek review of RBI norms on restructuring of stressed assets

Banks seek review of RBI norms on restructuring of stressed assets

What has happened?

The central bank has issued new rules to ensure faster recovery of bad loans, as banks could recover only Rs 7,106 crore of written-off loans till December 31, 2017 while a total of Rs 84,272 crore worth of bad loans were written-off during the same period.

RBI’s 12 Feb circular

• 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
• 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

Reasons for issuing new rules by RBI

• The RBI announced the revised framework to align it with the Insolvency and Bankruptcy Code (IBC), which is now a key resolution platform for the lenders
• The RBI now requires banks to implement a resolution plan within 180 days and in case of non-implementation, lenders are required to file an insolvency application.
• The central bank has issued new rules to ensure faster recovery of bad loans, as banks could recover only Rs 7,106 crore of written-off loans till December 31, 2017 while a total of Rs 84,272 crore worth of bad loans were written-off during the same period

Key issue now

• The Key bone of contention is the RBI’s instruction to recognise loan default from day one and to initiate steps for resolution
• Bankers argue that recognition of default from day one and initiation of resolution steps immediately may affect loan accounts especially in the infrastructure and core sectors

RBI withdrew all earlier instructions

• While issuing the revised framework for resolution of loans, the RBI withdrew all its earlier instructions on resolution of stressed assets such as Framework for Revitalising Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR, and Scheme for Sustainable Structuring of Stressed Assets (S4A)
• The Joint Lenders’ Forum as an institutional mechanism for resolution of stressed accounts has also been discontinued.