With an aim to adopt effective judiciary and bankruptcy systems to deal with the NPA menace, the Reserve Bank of India (RBI) has stressed that the framework to revitalise distressed loans in the economy will be fully effective from April 1. The RBI’s new framework will help the domestic banking system to recognise financial distress early, take prompt steps to resolve it, and ensure fair recovery for lenders and investors. The asset quality of Indian banks has been showing downward trend since global financial crisis, 2008.
In order to improve the current restructuring process, the RBI framework will mandate the independent evaluation of large-value restructurings with a focus on viable plans and a fair sharing of losses between the promoters and the creditors. The framework proposal also noted that if a loss is fully disclosed, lenders can spread the loss on sale over two years. The central bank emphasized that lenders are encouraged to start early implementation of framework that do not require issuance of any notifications, regulatory guidelines and development of systems at their end. RBI also highlighted that banks and specified non-bank lenders should put in place necessary systems and infrastructure to implement the framework effectively.
The RBI further noted that in case borrowers do not co-operate with lenders in resolution, borrowing could become more expensive for them. Further, refinancing or take-out financing will be possible over a longer period and will not be interpreted as restructuring. Lenders will be given more liberal regulatory treatment for asset sales. The proposal also include allowing leveraged buyouts for specialised entities for acquisition of ‘stressed companies’ and to encourage sector-specific companies / private equity firms to play an active role in the stressed assets market.
In order to improve the current restructuring process, the RBI framework will mandate the independent evaluation of large-value restructurings with a focus on viable plans and a fair sharing of losses between the promoters and the creditors. The framework proposal also noted that if a loss is fully disclosed, lenders can spread the loss on sale over two years. The central bank emphasized that lenders are encouraged to start early implementation of framework that do not require issuance of any notifications, regulatory guidelines and development of systems at their end. RBI also highlighted that banks and specified non-bank lenders should put in place necessary systems and infrastructure to implement the framework effectively.
The RBI further noted that in case borrowers do not co-operate with lenders in resolution, borrowing could become more expensive for them. Further, refinancing or take-out financing will be possible over a longer period and will not be interpreted as restructuring. Lenders will be given more liberal regulatory treatment for asset sales. The proposal also include allowing leveraged buyouts for specialised entities for acquisition of ‘stressed companies’ and to encourage sector-specific companies / private equity firms to play an active role in the stressed assets market.
