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RBI’s new stressed assets resolution framework now well-balanced

July 2019

RBI has revised the prudential framework for resolution of stressed assets, which strikes a fine balance between the tight regulatory timelines mandated previously to resolve stressed assets and inordinate delays that occurred in the past when resolving and provisioning for such assets. 

By doing away with mandatory referral of stressed accounts under the Insolvency and Bankruptcy Code (IBC), the new framework puts the onus on banks to devise a suitable resolution plan (RP). It also provides a 30-day review period after default for them to decide on resolution strategy, including nature and implementation approach (see Table 1).

According to Krishnan Sitaraman, Senior Director, CRISIL Ratings, “The new prudential framework is a breather for stressed accounts where RPs were under implementation but had to be referred to the IBC because of not being completed in 180 days. One of the key beneficiaries will be stressed power sector assets that were operational and on the verge of being referred to insolvency proceedings under the IBC. These are estimated at ~Rs 1 lakh crore and banks were staring at significant haircuts on many of these assets.”

Vydianathan Ramaswamy, Associate Director, CRISIL Ratings, adds, “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 per cent as of March 2019 after tripling to ~11.5 per cent in the four fiscals till March 2018.

Table 1: Key changes in the revised prudential framework and their impact

To discourage banks from delaying BOT, the resolution process and reference to IBC, the prudential framework stipulates additional provisioning of 20-35 per cent in a phased manner (see Table 2) beyond what has already being made in accounts where resolution has been delayed beyond 210 days from default. 

Table 1: Key changes in the revised prudential framework and their impact
The revisions Potential impact
Change in timelines for implementation of RP Additional 30-day review period provides
lenders time to formulate strategy forresolution
No mandatory referral of stressed assets
for resolution under IBC
Will provide an option to resolve stressed assets
outside the ambit of IBC, which in some cases
can lead to improved realisations owing to
better preservation of intrinsic value of assets
Inter-creditor agreement (ICA) between lenders Will lead to faster decisions with approval of only
75 per cent of lenders (by value) and 60 per cent
(by number of lenders) needed,
instead of 100 per cent previously
Accelerated provisioning on delay
in implementation of RP
Will disincentivise 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 the right direction, considering they
form around 20 per cent of overall credit
in the Indian financial landscape


Table 2: Timelines for additional provisioning



Timeline for implementation of RP Additional provisions to be made
as a percentage of total outstanding
if RP is not implemented within timeline
180 days from the end of review
period (210 days after default)
20 per cent
365 days from default 15 per cent
(Total additional provisioning of 35%)