RBI’s Guidelines on Government Debt Relief Scheme

January 2, 2025

The Reserve Bank of India (RBI) has introduced guidelines for lenders regarding their involvement in the Government Debt Relief Scheme (DRS). This initiative aims to assist borrowers, particularly farmers, during crises such as natural disasters. State governments have announced various DRS to provide relief, especially in the lead-up to elections. The RBI’s guidelines include a model operating procedure (MOP) to ensure effective implementation and adherence to financial discipline.

Overview of the Debt Relief Scheme (DRS)

The DRS offers financial relief to borrowers facing hardships. It allows for the waiver of interest or principal payments. The scheme is particularly focused on farmers and other vulnerable groups. The RBI emphasises that DRS should be a last resort after other financial stress alleviation measures have failed.

Guidelines for Lenders

Lenders must adhere to the RBI’s guidelines when participating in DRS. They should base their decisions on an approved board policy and existing regulatory standards. Lenders are required to assess the potential outstanding amounts, including accumulated interest, before agreeing to DRS. Clear communication with borrowers about terms and conditions is essential for transparency.

Role of State Governments

State governments play important role in the DRS framework. They must consult with the State Level Bankers’ Committee (SLBC) and District Level Consultative Committee (DCC) before announcing any DRS. This engagement helps develop a coordinated plan for the scheme’s design and implementation. The state must ensure budgetary provisions are in place to cover the costs of the DRS.

Prudential Considerations

The RBI has raised concerns about the prudential implications of frequent DRS announcements. If not managed properly, these schemes could undermine credit discipline. Lenders must be cautious about creating receivables against the government and should follow prudential norms regarding income recognition and asset classification.

Sacrifices by Lenders

Lenders may need to waive unrealised interest or principal as part of DRS. Such actions will be classified as compromise settlements, subject to standard provisioning and classification norms. Any new credit extended to borrowers under DRS is at the lender’s discretion, following internal policies and regulations.

SLBC – State Level Bankers’ Committee for coordination.
DCC – District Level Consultative Committee for local engagement.
DBT – Direct Benefit Transfer, an alternative relief measure.
MOP – Model Operating Procedure for DRS implementation.
Credit Score – Affected by DRS terms and conditions.

Implementation Timeline and Criteria

The DRS must include a detailed timeline for critical events. This includes deadlines for filing and approving claims. Eligibility criteria for borrowers should be objective and transparent. The scheme should not impose restrictions on timely repayments to encourage responsible borrowing.

Financial Stability and Moral Hazard

The RBI has emphasised that DRS should not compromise the financial stability of states. It is crucial to avoid creating moral hazards among borrowers. The design of DRS needs to consider the long-term impacts on the credit culture and borrower behaviour.

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