Prudential Framework for Resolution of Stressed Assets

The Reserve Bank of India (RBI) recently released a prudential framework for the resolution of stressed assets by banks. It is a set of guidelines to banks for tackling their stressed assets.

The revised framework for the resolution of stressed assets is credit positive, because it brings back the focus on the need for the timely resolution of such assets, and the buildup of loan loss provisioning against those assets

Significance of the Prudential Framework is that it replaces the previous controversial/stringent and Supreme Court squashed stressed asset resolution guidelines published in February 2018.

The main feature of the new Framework is that it relaxes several previous criteria related to stressed asset management under the 2018 version.

Though the content of the previous revised framework (February 12th, 2018) and the newly issued prudential framework differs slightly, the purpose of both remains the same ie., management of stressed assets in the banking system.

Key changes in the revised prudential framework and their impact

The revisions Potential impact
Change in timelines for implementation of RP The additional 30-day review period provides lenders time to formulate their strategy for, and approach to, resolution
No mandatory referral of stressed assets for resolution under IBC It will provide an option to resolve the stressed assets outside the ambit of IBC, which in some cases can lead to improved realizations due to better preservation of intrinsic value of the assets
Inter-creditor agreement (ICA) between lenders Will lead to faster decisions with approval of only 75% of lenders (by value) and 60% (by number of lenders) needed instead of 100% previously
Accelerated provisioning on delay in implementation of RP. Will disincentivize lenders from avoiding referring cases to IBC wherever required
Inclusion of non-banking financial companies (NBFCs) and small finance banks (SFBs) under the framework Step in right direction considering they form around 20% of overall credit in the Indian financial landscape.

The revised framework provides much needed clarity on the way forward in stressed assets resolution after the Supreme Court had annulled the RBI’s previous circular of February 2018. It should help reduce the stockpile of gross non-performing assets (NPAs) further over the medium term

NPAs in the banking system have declined in fiscal 2019 to ~9.3% as of March 2019 after tripling to ~11.5% in the four fiscals till March 2018

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