RBI Issues Revised Circular For Resolution Of Stressed Assets

The Reserve bank of India (RBI) issued a revised circular for resolution of stressed assets after the Supreme Court in April declared its previous guidelines issued on February 12, 2018 as ultra vires. The earlier circular mandated that the resolution process begin immediately on the day after default of loans worth over Rs 2,000 crore.

The new norms replaces all the earlier resolution plans such as the 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), and the joint lenders'' forum with immediate effect.

The new circular provides for a framework for early recognition, reporting and time-bound resolution of bad loans. The central banks said lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA). Since default with any lender is a lagging indicator of financial stress faced by the borrower, it is expected that the lenders initiate the process of implementing a resolution plan (RP) even before a default.

According to the new circular, the lenders can start resolution process for a stressed asset within 30 days of default. "All lenders must put in place Board-approved policies for resolution of stressed assets, including the timelines for resolution," according to RBI's revised circular.

"During the review period of thirty days, lenders may decide on the resolution strategy, including the nature of the resolution plan, the approach for implementation of the resolution plan, etc. The lenders may also choose to initiate legal proceedings for insolvency or recovery," the circular added.

In cases where resolution plan is to be implemented, all lenders shall enter into an inter-creditor agreement (ICA), during the 30-day review period, to provide for ground rules for finalisation and implementation of the resolution plan in respect of borrowers with credit facilities from more than one lender, RBI's circular read.

The inter-creditor agreement shall provide that any decision agreed by lenders representing 75 per cent by value of total outstanding loans and 60 per cent of lenders by number shall be binding on all the lenders, RBI said.

The RBI circular noted that in case the defaulted loan amount is more than Rs 2,000 crore the resolution plan should be implemented within 180 days from the end of review period.

The lenders are free to initiate legal proceedings for insolvency or recovery, the central bank said. The joint lenders'' forum (JLF) as mandatory institutional mechanism for resolution of stressed accounts also stands discontinued, the RBI said.

The RBI said the new directions will come into force with immediate effect.