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    RBI Announces Additional Regulatory Policy Measures Amid Pandemic

    August 06, 2020

    RBI published a statement on the recent developmental and regulatory policy measures. The statement highlights that the regulatory focus over the past few months has been to frame appropriate policy responses to mitigate the fallout impact of COVID-19 event on the financial institutions and their constituents. The key policy measures covered in this statement relate to the resolution framework for COVID-19 related stress, restructuring of the debt of Micro, Small, and Medium Enterprises (MSMEs), investment by banks in debt mutual funds and debt exchange-traded funds (ETFs), review of priority sector lending guidelines, and the creation of an Innovation Hub. RBI also published circulars specifying conditions for the restructuring of MSME debt and the resolution framework for COVID-9-related stress.

    Resolution framework for stress related to COVID-19 event

    The resolution framework for COVID-19-related stress is applicable to all commercial banks, all primary (Urban) co-operative banks/state co-operative banks/district central co-operative banks, all-India financial institutions, and all non-banking financial companies (including Housing Finance Companies). Under the prudential framework for resolution of stressed assets, RBI has decided to provide a window to enable lenders to implement a resolution plan in respect of eligible personal loans and corporate exposures without change in ownership, while classifying such exposures as Standard subject to specified conditions. Such conditions are considered necessary to ensure that the facility of this resolution window is available only to the COVID-19-related stressed assets. The circular also lists the disclosure requirements for the lending institutions with respect to the resolution plans implemented under this framework. The key features of the resolution framework for exposures other than personal loans are as under:

    • Only those borrower accounts shall be eligible for resolution under this framework that were classified as standard, but not in default for more than 30 days with any lending institution as on March 01, 2020. Additionally, the accounts should continue to remain standard till the date of invocation.
    • The resolution plan may be invoked anytime till December 31, 2020 and shall have to be implemented within 180 days from the date of invocation.
    • Lenders shall have to keep additional provisions of 10% on the post-resolution debt.
    • To enforce collective action, specific voting thresholds are being prescribed, even for invocation of the resolution plan; the lending institutions not signing the inter-creditor agreement within 30 days from the date of invocation shall attract higher provisions.
    • Post-implementation, the asset classification of the account shall be retained as standard, or if the account had slipped into a non-­performing asset after invocation but before implementation, the asset classification shall be restored on implementation.
    • An Expert Committee, constituted by RBI, will make recommendations to RBI on the required financial parameters, along with the sector-specific benchmark ranges for such parameters, to be factored into each resolution plans. The Expert Committee will also undertake a process validation of resolution plans for accounts above a specified threshold.

    The lending institutions may allow extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years.
    With respect to personal loans, a separate framework is being prescribed. The resolution plan for personal loans under this framework may be invoked till December 31, 2020 and shall be implemented within 90 days thereafter. The lending institutions are, however, encouraged to strive for early invocation in eligible cases. The timelines for implementation of resolution plan in case of personal loans are assessed to be adequate since, unlike larger corporate exposures, there will not be any requirement for third-party validation.

    Other key announcements

    The statement also addresses the treatment of debt mutual funds/exchange-traded funds (ETFs) for computing capital charge for market risk under the Basel III capital regulations. RBI has issued a separate circular on this, which has been covered in detail separately. The additional key announcements in the recent statement on developmental and regulatory policy measures are as follows:

    • With regard to MSMEs, a restructuring framework is already in place for MSMEs that were in default but "standard" as on January 01, 2020, subject to the restructuring being implemented until December 31, 2020. Recognizing the need for continued support to MSMEs’ meaningful restructuring, it has been decided that, in respect of MSME borrowers facing stress on account of the economic fallout of the pandemic, lending institutions may restructure the debt under the existing framework, provided the borrower’s account was classified as standard with the lender as on March 01, 2020. This restructuring shall be implemented till March 31, 2021. RBI has already published a circular on restructuring of advances in the MSME sector.
    • With a view to align the priority sector lending guidelines with emerging national priorities and bring sharper focus on inclusive development, these guidelines have been reviewed after wide-ranging consultations with all stakeholders. The revised guidelines also to encourage and support environment friendly lending policies to help achieve the Sustainable Development Goals. To address the regional disparities in the flow of priority sector credit, an incentive framework has also been put in place for banks. Other changes include broadening the scope of priority sector lending to include startups; increasing the limits for renewable energy, including solar power and compressed bio gas plants; and increasing the targets for lending to "Small and Marginal Farmers" and "Weaker Sections." Detailed guidelines in this regard will be issued shortly.
    • With respect to fintech developments, RBI will set up an Innovation Hub in India to promote innovation across the financial sector by leveraging on technology and create an environment that would facilitate and foster innovation. Additionally, six proposals were accepted under the Regulatory Sandbox, the pilot studies or trials of which have been delayed on account of the present COVID-19 situation.

    Keywords: Asia Pacific, India, Banking, COVID-19, Resolution Framework, Regulatory Capital, Innovation Hub, Basel, Credit Risk, Market Risk, Regtech, Loan Moratorium, RBI

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