With the slowdown of the Indian economy, a number of companies/projects are under stress. As a result, the Indian banking system has seen increase in NPAs and restructured accounts during the recent years.
The Reserve Bank today announced a framework whereby banks will have to report all their loans over Rs 5 crore to a central repository at the RBI. It also told banks to set in rules that will ensure early recognition of stressed loans. It has ensured lower provisions of restructuring is underway, but imposes higher provisions if stressed loans or NPLs are not resolved early.
The main features of the framework are:
Early formation of a lenders’ committee with timelines to agree to a plan for resolution.
Incentives for lenders to agree collectively and quickly to a plan: better regulatory treatment of stressed assets if a resolution plan is underway, accelerated provisioning if no agreement can be reached.
Improvement in current restructuring process: Independent evaluation of large value restructurings mandated, with a focus on viable plans and a fair sharing of losses (and future possible upside) between promoters and creditors.
More expensive future borrowing for borrowers who do not co-operate with lenders in resolution.
More liberal regulatory treatment provided for asset sales:
Lenders can spread loss on sale over two years provided loss is fully disclosed.
Take-out financing/refinancing possible over a longer period and will not be construed as restructuring.
Leveraged buyouts will be allowed for specialised entities for acquisition of ‘stressed companies’.
Steps to enable better functioning of Asset Reconstruction Companies mooted.
Sector-specific Companies/Private equity firms encouraged to play active role in stressed assets market.
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