RBI Releases ‘Framework for Revitalising Distressed Assets’ To Strengthen Financial System

The domestic market is facing a severe slowdown in the economy due to 2008 financial crisis coupled with political policy paralysis. As a result, more and more distressed financial assets are being seen in the Indian banking system, which are eroding the economic value in the country. There have been an increasing amount of NPAs and restructured accounts in the recent past.

To avoid deterioration of value, the Indian financial system needs to set up mechanisms to recognise financial distress at its early stages. Furthermore, lenders should take prompt action to resolve and ensure recovery of assets. The RBI governor has already indicated one of the five pillars for improving the financial system as improvement in the system's ability to deal with corporate distress by strengthening real and financial restructuring as well as debt recovery.

Recently, the RBI has come out with a discussion paper which outlines the corrective action plan for identification of problem cases, timely restructuring of accounts and prompt recovery. Some of the key highlights of the paper are as follows:

• 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 of asset sales.

The RBI will be setting up a Central Repository of Information on Large Credits (CRILC) to collect, store and disseminate credit data to lenders. The lenders will have to furnish credit information to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs 5 crore and above. Furthermore, in line with instructions issued in an RBI circular, before a loan account turns into an NPA, lenders should identify incipient stress in the account by creating a new sub-asset category, viz. ‘Special Mention Accounts’ (SMA).

Interestingly, all lenders have been asked to form a lenders’ committee (which would be named as the Joint Lenders' Forum (JLF)) under a convener and formulate a joint Corrective Action Plan (CAP) for early resolution of stress in accounts as soon as they are reported to CRILC as SMA-2. Under the CAP, the JLF has various options such as rectification, restructuring and recovery. The paper has a number of suggestions on other aspects such as refinancing of project loans, prudential norms on asset classification & provisioning, penal measures for non-adherence, wilful defaulters, accountability of promoters/directors/auditors, credit risk management, sale of NPAs to asset reconstruction companies (ARCs), etc.

The suggestions are complex, no doubt, but we opine that their implementation in the Indian financial industry will definitely improve its productivity along with appreciating economic value in the domestic market. Further, this ‘Framework for Revitalising Distressed Assets’ is expected to heighten the level of transparency in the Indian financial system. However, this very factor would be the biggest hurdle in the widespread acceptance of this kind of framework. Hence, we need to wait and watch if the majority of lenders accept this framework.