RBI Proposes New Norms for Debt Resolution

The Reserve Bank of India (RBI) has proposed new norms under Prudential framework for resolution of stressed assets for debt resolution after the earlier one was struck down by the Supreme Court.

New Norms

• New norms are applicable for loan accounts with exposure of Rs 2,000 crore and above.
• For loan accounts of Rs 1,500 crore and up to Rs 2,000 crore, the new norms will be applicable from January 1, 2020, and the applicability date for loan accounts below Rs 1,500 crore will be announced by the RBI in due course.
• Lenders are required to review the working-capital loan accounts within 30 days of first default, instead of just after a day of default previously.
• Lenders are required to initiate a resolution plan within the 30-day review period which may include choosing a strategy, including the nature of the resolution plan and the approach for implementation of the plan.
• Lenders must implement a resolution plan within 180 days after the 30-day review period is over. The lenders will now have a total of 210 days from the day of first default to resolve the matter.
• The lenders may also choose to initiate legal proceedings to initiative insolvency or recovery of loans.
• All lenders must sign an inter-creditor agreement to lay out the ground rules for finalization and implementation of the resolution plan.
• Failing to come up with a resolution plan within the 210-day period, banks will have to make additional provisions of 20% on the bad loan.
• The resolution plan will require the approval of 75% of the creditors by the value of total outstanding credit facilities and 60% of lenders by number.

The Supreme Court had earlier struck down RBI’s circular on bad loans which mandated lenders to start resolution even if there was a one-day default. Several companies argued that the time period allowed for bankruptcy resolution wasn t enough.