RBI published the RBI (Prudential Framework for Resolution of Stressed Assets) Directions 2019, which shall come into force with immediate effect. These directions encompass a framework for early recognition, reporting, and time bound resolution of stressed assets. The provisions of these directions shall apply to scheduled commercial banks (excluding regional rural banks), all India term financial institutions (NABARD, NHB, EXIM Bank, and SIDBI), small finance banks, and systemically important non-deposit taking non-banking financial companies, and deposit-taking non-banking financial companies.
The fundamental principles underlying the regulatory approach for resolution of stressed assets are as under:
- Early recognition and reporting of default in respect of large borrowers by banks, financial institutions, and non-banking financial companies
- Complete discretion to lenders about design and implementation of resolution plans, in suppression of earlier resolution schemes, subject to the specified timeline and independent credit evaluation
- A system of disincentives in the form of additional provisioning for delay in implementation of resolution plan or initiation of insolvency proceedings
- Withdrawal of asset classification dispensations on restructuring. Future upgrades to be contingent on a meaningful demonstration of satisfactory performance for a reasonable period
- For restructuring, the definition of "financial difficulty" to be aligned with the BCBS guidelines
- Signing of inter-creditor agreement by all lenders to be mandatory, which will provide for a majority decision making criteria
RBI will issue directions to banks for initiation of insolvency proceedings against borrowers for specific defaults so that the momentum toward effective resolution remains uncompromised. It is expected that the current circular will sustain the improvements in credit culture that have been ushered in by the efforts of the government and RBI so far and that it will go a long way in promoting a strong and resilient financial system in India.
Effective Date: June 07, 2019
Keywords: Asia Pacific, India, Banking, Prudential Framework, Resolution of Stressed Assets, Reporting, NBFC, Resolution Planning, RBI
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