The RBI is likely to adopt a more accommodative approach towards resolution of stressed assets when it issues a revised circular, replacing the controversial February 12 circular quashed by the Supreme Court.
Sources said the major contention in the Reserve Bank of India's (RBI) controversial February 12, 2018, circular, including the one-day default norm, that was challenged in the court leading to its quashing, will be done away with in the new circular.
Instead, banks will be given 30 days time from the first default to identify and qualify an account as a bad debt (special mention account or SMA) and initiate a resolution exercise.
Besides, the 180-day period given for completing the bank-led resolution will start only after an account is declared an SMA I thirty days from first default, with RBI likely to accede to a suggestion given by the Indian Bans' Association (IBA) to allow individual banks to grant additional 60 days time for approval and implementation of a resolution plan (RP).
So, instead of having 180 days time for a bank-led resolution from day one of default, under a new RBI circular, banks could get up to 270 days to resolve an asset without taking it to the National Company Law Tribunal (NCLT) for resolution.
Sources said that the RBI is being guided by suggestions earlier given by the IBA on classification of non-performing assets (NPAs or bad loans) and their resolution. The IBA has made a presentation to the RBI Governor on April 10.
The central bank is expected to retain the main contours of its February 12, 2018, circular while also making the referral to the NCLT non-compulsory.
Also, the RBI could relax norms for approval of a bank led resolution plan. Instead of requiring the unanimous approval of banks, lenders may now get to approve a resolution plan with 90 per cent voting.
The changes in the circular could also relax stringent provisions relating to restructuring for compromise settlements.
Instead of classifying a compromise settlement as restructuring, if the settlement amount payment period extends beyond 90 days requiring a complex rating procedure (RP4), the changed norms could follow the IBA's suggestion of extending the period of settlement amount payment to 180 days.
Also, for a compromise settlement, IBA has suggested that RP4 provision should be withdrawn and only income recognition and asset classification (IRAC) norms used once an account is considered as being restructured.
The IBS has also suggested that an account should be upgraded if 10 per cent of the sustainable debt portion is paid, instead of the current provision requiring payment of 20 per cent of outstanding principal and interest. This will benefit large infrastructure projects having big exposure to banks.
On April 2, the Supreme Court struck down a February 12, 2018, circular of the RBI that asked banks to initiate insolvency process against companies even if there was a day's delay in payment of dues.
As per the circular, banks were told to start the resolution process as soon as a borrower defaulted on a term loan and were given 180 days to cure it, failing which the account would have to be referred to the NCLT. It also said that any company that defaulted on its loan repayment obligation even by a day should be declared a defaulter.
In the earlier circular, the RBI had withdrawn all existing debt-restructuring schemes and asked banks to draw resolution plans for all assets where the banking sector's exposure was more than Rs 2,000 crore.