Wednesday, 14 February 2018

New Bad Loan Resolution Framework : RBI

By Aashi Sehrawat
To overcome bad loan problems, Reserve Bank of India (RBI) has come up with a strict 180-day timeline within which banks have to finalise a resolution plan in case of a default, failing which they have to refer the account for bankruptcy under the Insolvency and Bankruptcy Code (IBC). The loan-restructuring mechanisms were issued late on Monday. This framework seeks to push more big defaulters towards bankruptcy to get rid of the bad loans faced by lenders.
A major change that will impact banks immediately is the fact that most existing stressed asset schemes have been subsumed by the new framework, i.e., schemes such as Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR), the Scheme for Sustainable Structuring of Stressed Assets (S4A), and the Flexible Structuring of Long Term Loans won't exist now.
So, what does the framework describe?
·    Banks must report defaults on a weekly basis in the case of borrowers with more than Rs 5 crore in bank debt. Once a default has occurred, banks will have 180 days within which to come up with a resolution plan. Should they fail, they will need to refer the account to the IBC within 15 days.
·   The new set of rules mandate that all future restructuring will amount to the account being termed as bad, which means an immediate provisioning of 15%.
·   The Joint Lenders Forum (JLF), which had been set up to coordinate resolution of large consortium loans, has also been disbanded.
·        Since the Revised Framework has replaced all the existing schemes, so now existing accounts under these schemes, (if not restructured and implemented), will now be governed by this revised framework. Lenders would need to go back to the drawing board to ensure that the restructuring meets the norms under the Revised Restructuring Framework.
By this big reform in plans, RBI has removed many constraints on debt restructuring. The framework will help the Indian Banking System to move towards time bound resolution of stressed loans.

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