New RBI framework on stressed assets resolution provides a breather to lenders: SBI Report

RBI issued a new prudential framework on resolution of stressed assets on June 7

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The new prudential framework on resolution of stressed assets issued by Reserve Bank of India on June 7 will provide some leeway to lenders and encourage them to refer cases to the insolvency and bankruptcy courts, a research report by the country’s largest lender State Bank of India said on Tuesday.

The new framework replaced the controversial circular that RBI had issued on February 12, 2018, which was quashed by the Supreme Court earlier this year.

One of the big changes in the new framework is that lenders now get 30 days from the day of default to start working on a resolution plan. Also, under the new framework, 75 per cent lenders by value and 60 per cent by numbers would be required for resolution of a stressed asset. Earlier, 100 per cent consensus was required among the lenders.

Furthermore, the new framework will now be applicable not just to scheduled commercial banks but also to small finance banks and non-banking financial companies. Penalty provision has also been introduced in the new framework by the central bank. Therefore, banks would have to make 20 per cent additional provision if a resolution plan is not implemented within 180 days from the end of the review period, and 35 per cent additional provisioning 365 days from commencement of review period.

“With the revised guidelines, the RBI has made it clear that there is no scope for old restructuring schemes such as CDR (corporate debt restructuring), SDS (strategic debt restructuring), S4A (scheme for sustainable structuring of stressed assets) etc. even without the February 12 circular. Further, though the RBI has not mandated to refer default cases to IBC, but incentivising the lenders by way of reversal of additional provision on referral to IBC will definitely influence the resolution decision,” said Soumya Kanti Ghosh, group chief economic advisor at SBI.

Furthermore, a better time frame and transition offered in the revised framework would allow the lenders the headroom and flexibility for resolution in large ticket cases, added Ghosh.

SBI research shows that the various efforts the RBI had made in strengthening its regulatory and supervisory framework and the resolution mechanism initiated through the IBC were bearing fruit.

Up to March 2019, financial creditors have recovered around 43 per cent or Rs 75,300 crore from Rs 1.75 lakh crore claims admitted through the IBC, the report noted. It expects lenders to further recover another Rs 80,000 crore to Rs 1 lakh crore in the current financial year ending March 2020.

Legal experts like Vishrov Mukerjee, partner J. Sagar Associates, say the new framework is a very good balance between discretion provided to bankers and reporting and compliance of bad loans and despite the banks not bound by law to take companies to bankruptcy court after 180 days, the higher provisioning requirement will disincentivise lenders from delaying the resolution process.

“The number of cases going into bankruptcy might come down but banks will still use this route if they don’t find a resolution within the timelines otherwise their provisioning cost will go up. IBC is an important reform that works as a threat to owners of companies of losing control of their company. So the role of IBC will continue to be important in bad loan resolutions,” said Mukerjee.

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