Debt Resolution Norms Eased

The Reserve Bank of India (RBI) had released a new set of norms on stressed asset resolution that will ease the controversial circular passed by the RBI in February 2018.

In-Detail

As per the circular of February 12, 2018, the RBI had made it mandatory for the lenders to start NPA resolution proceedings if there is a single day default.
The circular was declared as unconstitutional by the Supreme Court two months ago.
Now, the RBI with its new norms has increased the resolution proceedings time from 1 day to 1 month.
That is, the defaults should be recognised and reviewed within 30 days.
This period is thus termed as “review period”.
During this period, the lenders can decide on a strategy for a resolution that includes a resolution plan (RP), approach for implementing the plan etc.
The new norms also allow lenders to initiate legal proceedings for insolvency or recovery.
The norms call for lenders to enter into an Inter-Creditor Agreement (ICA) within the review period in case the RP is to be implemented.
The ICA provides that any decision taken by 75% of the lenders by the value of total outstanding and 60% of lenders by number.
RP is to be implemented within 180 days after the review period.
The review period norm will come into effect immediately for loans over Rs. 2000 crore and from January 1, 2020, for loans between Rs. 1500 crore and Rs. 2000 crore.
Banks have also been disincentivized in case the RP is not implemented within 180 days.
They need to make additional provisioning of 20% and further 15% if RP is not implemented within 365 days.
The additional provisioning will be reversed when the case is pursued through Insolvency and Bankruptcy Code (IBC).
Half of the provisioning will be reversed upon filing for insolvency application and the additional provisioning will be reversed when the case is admitted for insolvency proceedings.
The new norms are applicable to commercial banks, non-banking financial companies, small finance banks, and other financial institutions.

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Conclusion

Resolution of NPAs has become a major problem for the Indian finance sector.
Unlike the previous norms, that did not give time for lenders to prepare a strategy, the new norms are set to be a breather for both lenders and borrowers.
Timely resolution of NPAs is the need of the hour for Indian banks to get back to lending ways and help boost the economy.