By Jyoti Prakash Gadia
The RBI as regulator of Banks and NBFCs is playing a crucial role in establishing, maintaining and safeguarding stability of the financial system. The RBI regulations are intended to promote the integrity and effectiveness of the financial sector. The healthy balance sheets of the commercial banks with consistent reduction in the gross NPAs of the banks over the last several years (2.8 percent as on March 31, 2024 from a peak of 11.2 percent in FY18) indicates a proactive approach on the part of regulator and progress in level of compliance in respect to handling of the stressed assets portfolio of banks. Here we delve into broader aspects of the Stressed Assets Management framework.
Salient Features
As a part of the life cycle of a loan starting from sourcing, appraisal and sanction followed by disbursal, recovery of loans is an essential part of the whole cycle to ensure regular circulation of funds.
Non-recovery of dues leads to default and creation of stressed assets portfolio in the balance sheets of the banks. Effective handling of such cases assumes great importance in the context of robust and efficient functioning of banks.
From time to time, RBI has been revising and updating its guidelines through Master circulars, Master Directions and notifications in line with the changing requirements of the developing economy.
In this framework, early recognition of incipient stress in loan accounts has been emphasised immediately on default. The default means, non-payment of debt when whole or any part or instalment of the debt has become due and payable and is not paid by the debtor. The framework prescribes classification of accounts into subcategories of SMA (special mention accounts), namely, SMA 0, SMA-1, SMA-2 with overdues ranging from 0 days up to 90 days.
As per RBI guidelines, the banks are required to put in place Board-approved policies for resolution of stressed assets including timelines for resolution. Once a default is reported, the lenders are required to undertake a prima facie review of the borrower account within 30 days of such default. During this review period, the lenders need to decide on the resolution strategy, including the nature of RP(resolution process), the approach for implementation of RP etc. The RP may involve any action/plan/reorganisation, including but not limited to regularisation of the account by payment of all overdues by the borrower. sale of the exposure to other entities/investors, change in ownership and restructuring.
Restructuring
Restructuring inter alia involves an act in which a lender for economic or legal reasons relating to the borrower's financial difficulty, grants concessions to the borrower. Restructuring generally involves modification of terms of the advances/securities, for example, change of payment period/payable amount/the amount of instalments/rate of interest, roll over credit facilities, sanction of additional credit facilities/release of additional funds etc for an account in default.
To aid curing of default/enhancement of existing credit limits, compromise settlements where time for payment of settlement amount exceeds three months. The intention behind the restructuring exercise is to focus on rehabilitation, to preserve/protect/promote value and improve financial health of the borrower entity. The banks also need to have detailed policies on various signs of financial difficulty, providing quantitative as well as qualitative parameters for determining financial difficulty. Restructuring of the accounts therefore should be taken up judiciously after thorough assessment in a comprehensive manner.
In addition, as a part of stressed assets handling in case restructuring fails or is not found viable, the lenders also have a choice to initiate legal proceedings for insolvency(under The Insolvency and Bankruptcy Code-IBC 2016) or recovery through DRT/SARFAESI Act.
Role of Asset Reconstruction Companies
ARCs are expected to play a crucial role in the field of Stressed Asset Management with their exercise to take over stressed financial assets from banks so that the banks can concentrate on their core function of lending. ARCs are required to have expertise in recovery and reconstruction of ailing assets and help reduce the level of NPAs in the banking system by taking possession of secured assets of the borrower. RBI has stipulated very judicious regulations and framework for transparent robust and efficient governance of ARCs. The avenue of sale of stressed assets has evolved over time in line with the emerging scenario and the quantum of stressed assets sold as also the recovery has improved overtime.
Handling of stressed assets constitutes an important aspect of the financial ecosystem. RBI regulations have kept pace with market needs and changing requirements of the economy with perceptible impact on the functioning. Going forward a market for distressed assets may be developed by considering the inclusion of additional stakeholders with strong fundamentals and possessing expertise in resolution to create a win-win situation.
(Jyoti Prakash Gadia is M.D, Resurgent India.)
Views are personal and do not represent the stand of this publication.
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