The new Prudential Framework for Resoluton of Stressed Assets issued by the Reserve Bank of India, in fulfilment of the central bank’s promise to come out with a fresh set of directions after its February 12 Circular had been struck down by the Supreme Court, does not offer defaulting companies any substantial relief from the rigorous discipline laid down in the earlier circular.

The essential difference is two-fold: one, banks and defaulters get additional 30 days for implementation of the resolution plans that still have to be put in place for them in every individual case, and two, defaulters get three rungs to descend to Non-Performing Asset hell, instead of plunging straight to that depth, as in the February 12 circular.

After one day’s delay in debt servicing, the defaulter would be labelled Special Mention Asset 1, and stay there till day 29, after which and till day 59, the defaulter would be Special Mention Asset 2. If repayment still does not happen, the defaulter would descend to Special Mention Asset 3 during days 6-90 of the initial default, and then be labelled an NPA thereafter. But the RBI also says that after Day 1 of default, the asset would lose the status of a standard asset.

In the first 30 days since initial default, a review would be conducted of the defaulting loan and a resolution plan finalised with the consent of 75% of the lenders. The Resolution Plan has to be implemented within 180 days of conclusion of the review.

The net effect is that the resolution plan has to be implemented within 210 days of the initial default, instead of 180 days of the initial default. Companies have been lobbying to avoid that initial labelling as a defaulter. That wish has not been granted.

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The RBI has also asked for additional provisioning, to concentrate the minds of the banks on tackling bad loans.





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