RBI to relax stringent norms for resolution of bad loans

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The Reserve Bank of India (RBI) is likely to loosen some of the stringent norms set for the resolution of bad loans. It is expected that some of these regulations will be modified without diluting the norms set forth by the Insolvency and Bankruptcy Code (IBC). This change is likely to benefit various small and medium business enterprises that have defaulted on their loans.

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Stringent norms may work against small and medium business firms by forcing them into rapid bankruptcy. This, in turn, could affect job generation throughout the country. The government is also of the view that NPA resolution should not lead to job losses in the small and medium business sector. Considering all these factors, certain relaxations may be provided to defaulters in a bid to ensure smooth resolutions of bad loans.

Under the current norms, even a one-day delay in the repayment of loans could be considered as a default. This time limit is likely to be increased to 30 days under the revised norms. Also, the resolution plan could be cleared with approval from 75% of the creditors. Relaxation of these norms is also to ensure that promoters do not delay the resolution process through IBC.

In February, the RBI scrapped all debt restructuring programs including Corporate Debt Restructuring (CDR) and Strategic Debt Restructuring (SDR) following the successful incorporation of the IBC. It also came up with a framework to identify bad loans immediately. Under this process, even a few days of default could constitute a bigger problem for companies once the default becomes public.

The government and the RBI view that these stringent norms could significantly affect the chances of reviving stressed assets. Moreover, they were also of the view that increasing the time limit to 30 days will not dilute the effectiveness of IBC. It is also expected that a common set of guidelines will be issued for the resolution of stressed assets since board-approved policies are likely to differ from lender to lender.

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