Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
RBI issues revised norms to deal with stressed assets
What to study?
For prelims: key highlights of the guidelines, about ICA.
For mains: need for and significance of these guidelines.
Context: Following the quashing of its ‘revised framework for resolution of stressed assets’ by the Supreme Court in April, the Reserve Bank of India has issued a ‘prudential framework for resolution of stressed assets’.
Highlights of the latest norms:
- The new framework gives lenders a breather from the one-day default rule whereby they had to draw up an resolution plan (RP) for implementation within 180 days of the first default.
- It gives lenders (scheduled commercial banks, all-India financial institutions and small finance banks) 30 days to review the borrower account on default.
- During this review period, lenders may decide on the resolution strategy, including the nature of the RP and the approach for its implementation.
- Lenders may also choose to initiate legal proceedings for insolvency or recovery.
- The new circular is also applicable to small finance banks and systemically important non-deposit taking non-banking financial companies (NBFCs) and deposit-taking NBFCs.
- In cases where the RP is to be implemented, all lenders have to enter into an inter-creditor agreement (ICA) for the resolution of stressed assets during the review period to provide for ground rules for finalisation and implementation of the RP in respect of borrowers with credit facilities from more than one lender.
- Under the ICA, any decision agreed to by the lenders representing 75 per cent of total outstanding credit facilities by value and 60 per cent by number will be binding upon all the lenders. In particular, the RPs will provide for payment which will not be less than the liquidation value due to the dissenting lenders.
- In cases where the aggregate exposure of a borrower to lenders (scheduled commercial banks, all-India financial institutions and small finance banks) is ₹2,000 crore and above, the RP has to be implemented within 180 days from the end of the review period, and the reference date has been set as June 7, 2019.
- In the case of borrowers in the ₹1,500 crore and above but less than ₹2,000 crore category, January 1, 2020 has been set as the reference date for implementing the RP. In the less than ₹1,500 crore category, the RBI will announce the reference date in due course.
If the implementation of an RP crosses the stipulated 180 days from the end of the review period, the lenders have to make additional provisions of 20 per cent of the outstanding loan. If this timeline exceeds 365 days, they further have to make a provision of 15 per cent.
These additional provisions are over and above the provisions already held or the provisions required to be made as per the asset classification status of the borrower account.
What is Inter-Creditor Agreement (ICA)?
The inter-creditor agreement is aimed at the resolution of loan accounts with a size of ₹50 crore and above that are under the control of a group of lenders. It is part of the “Sashakt” plan approved by the government to address the problem of resolving bad loans.
The agreement is based on a recommendation by the Sunil Mehta committee that looked into resolution of stressed assets.
Sources: the Hindu.
Mains Question: An agency like PARA is much needed to alleviate the NPA issue being faced by Indian banks. Discuss.