RBI WORKING ON EARLY WARNING SYSTEM FOR BAD LOANS

Mumbai, January 30:  

The Reserve Bank of India on Thursday said the framework to revitalise distressed loans in the economy will be fully effective from April 1. 
 
The framework has been envisaged as there is a need to ensure that the banking system recognises financial distress early, takes prompt steps to resolve it, and ensures fair recovery for lenders and investors.

The RBI said banks and specified non-bank lenders should put in place necessary systems and infrastructure to effectively implement the framework. 
 
The central bank said lenders are encouraged to start early implementation of those elements of the framework which do not require issuance of any notifications or regulatory guidelines, or development of systems at their end. 

The main proposals of the framework include early formation of a lenders’ committee with timelines to agree to a plan for resolution. 
 
Main proposals
Lenders will be given incentives to agree collectively and quickly work out a debt resolution plan; better regulatory treatment of stressed assets if a resolution plan is underway and accelerated provisioning if no agreement can be reached.

To improve the current restructuring process, the framework wants independent evaluation of large-value restructurings mandated, with a focus on viable plans and a fair sharing of losses (and future possible upsides) between the promoters and the creditors. 
 
Future borrowing could become more expensive if borrowers do not co-operate with lenders in resolution. Lenders will be given more liberal regulatory treatment for asset sales.

The RBI said lenders can spread the loss on sale over two years provided the loss is fully disclosed.

 Further, take-out financing / refinancing will be possible over a longer period and will not be construed as restructuring.

The central bank has allowed leveraged buyouts for specialised entities for acquisition of ‘stressed companies’. Sector-specific companies / private equity firms will be encouraged to play an active role in the stressed assets market.