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.
- 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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- 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.