RBI overhauls stressed asset resolution framework; gives 180-day ultimatum for major defaults

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The Reserve Bank of India (RBI) has announced a complete overhaul of the existing stressed asset resolution framework and has given 180 days for lenders to resolve major defaults. In a late night notification, the RBI came up with a revised framework that made a lot of changes to the existing rules related to bankruptcy proceedings. As a part of this new framework, the RBI has also announced some special rules for loans over Rs.500 crore and over Rs.2,000 crore.

stressed asset resolution

RBI has announced the withdrawal of several existing schemes and replaced them with a simplified generic framework. Some of the bankruptcy resolution schemes including Strategic Debt Restructuring Scheme (SDR), Scheme for Sustainable Structuring of Stressed Assets (S4A), Corrective Action Plan (CAP), etc. have been withdrawn.

The announcement also notified that banks must follow the new framework for stressed asset resolution. The new framework prevents banks from interpreting assets. For instance, an asset marked as stressed with one lender cannot be marked as standard with another lender. Once a default has been made in the borrower’s account, all lenders must work together to eliminate the default.

From February 23 onwards, all banks must identify major defaults on a weekly basis and notify the RBI credit registry. This will help the RBI identify assets that have defaults over Rs.500 crore. If there are no defaults in these accounts, banks must notify the loan information on a monthly basis.

The RBI has given a 180-day timeline for lenders to resolve accounts with defaults over Rs.2,000 crore. If the default is not resolved within this timeframe, lenders must initiate insolvency proceedings as per the Insolvency and Bankruptcy Code (IBC).

For accounts with defaults over Rs.500 crore, lenders must seek the ratings of two independent credit evaluation by ratings agencies. Based on the ratings obtained, lenders must decide whether or not to proceed with the insolvency proceedings.

While the stressed asset resolution framework has been revised overnight, the RBI has clarified that this will not be applied to accounts for which insolvency proceedings have already been initiated.

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