Banking Article, Banking Finance 2020, Banking Finance March 2020



Asset quality is the most important indicator of a Bank’s overall condition and thus, at aggregate level, asset quality of Banks explains the performance of the Banking system at Macro level. It also reflects the efficacy of Bank’s Credit Risk Management and the Recovery environment. Therefore, at the aggregate level, deterioration in asset quality leads to high level of NPAs which not only impacts the functional efficiency but also the ability of the Banks and Financial Institutions to recycle the available resources.

In order to address the problem of stressed assets in the Banking Sector, Reserve Bank of India (RBI), as a regulator of the Banking Sector in India, has over the years, provided the Banks as well as Corporate Sector with several schemes as mentioned belowfor timely resolution of stressed assets as well as cleaning the balance sheets of the Banks.

  • Corporate Debt Restructuring (2001) {CDR}
  • Framework for Revitalizing Distressed Assets in the Economy (2014)
  • Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries (2014) also known as 5:25 Scheme
  • Strategic Debt Restructuring {SDR} (2015)
  • Scheme for Sustainable Structuring of Stressed Assets (2016) also known as S4A.

Despite concerted efforts by the Banks to revive the stressed assets and keep them performing through the above mentioned schemes, the desired results in terms of smooth resolution were not achieved.  Reserve Bank of India (RBI), has therefore, vide Circular No: DBR.No.BP.BC.101/21.04.048/2017-18 dated 12.02.2018,issued fresh guidelines titledResolution of Stressed Assets – Revised Framework”and has withdrawn all the schemes announced earlier for resolution of stressed assets.

The extant guidelines, laid emphasis on:

  1. Early Identification and reporting of stress on standardized basis
  2. Implementation of Resolution Plan (RP) at trigger points
  3. Implementation Conditions for Resolution Plan (RP)
  4. Timelines for Large Accounts to be referred under IBC

The objective of frameworkwas to ensure that there is timely resolution of stress in Borrowal/loan accounts,Resolution Committees (RCs) were formed at all the Regional Offices. In order to ensure that a Standard Operating Procedure (SOP),for implementation of resolution procedures, is adopted uniformly at all levels across the Bank, it is felt that the SOPsshould be clearly defined and circulated by the Bank.


Based upon various representations HonorableSupreme Court pronounced the judgment on 04.04.2019, declared the circular“Resolution of Stressed Assets – Revised Framework” (RBI’s 12th February 2018) ultra vires as a whole and has no effect in law.We are highlighting the statement of Honorable Governor, Reserve Bank of India as under:

“Hon’ble Supreme Court has held the RBI circular dated February 12, 2018 on Resolution of Stressed Assets as ultra vires. The Court has held that RBI’s directions under Section 35AA of the Banking Regulation Act, 1949 “which are in respect of debtors generally” would be ultra vires of that section. Thus, the order of the Supreme Court mandates RBI to exercise its powers under Section 35AA “in respect of specific defaults by specific debtors”. The powers of RBI under Section 35AA and other sections of the Banking Regulation Act, 1949 are, therefore, not under doubt.

In light of Hon’ble Supreme Court order, the Reserve Bank of India will take necessary steps, including issuance of a revised circular, as may be necessary, for expeditious and effective resolution of stressed assets. The RBI stands committed to maintain and enhance the momentum of resolution”.

With above background, Reserve Bank of India, released its Revised Circular of 7th June 2019on “Prudential Framework for Resolution of Stressed Assets” Directions 2019.


These directions are issued with a view to provide a framework for:

  • Early recognition of stressed assets
  • Reporting of stressed assets
  • Time bound resolution of stressed assets.

These directions are issued without prejudice to issuance of specific directions, from time to time, by the Reserve Bank to banks, in terms of the provisions of Section 35AA of the Banking Regulation Act, 1949, for initiation of insolvency proceedings against specific borrowers under the Insolvency and Bankruptcy Code, 2016 (IBC).

The intent / purpose of this Framework is identification of weak / stressed accounts and speedy but viable resolution of the stressed assets.


The provisions of these directions shall apply to the following entities:

(a) Scheduled Commercial Banks (excluding Regional Rural Banks);

(b) All India Term Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI);

(c) Small Finance Banks; and,

(d) Systemically Important Non-Deposit taking Non-Banking Financial Companies (NBFC-ND-SI) and Deposit taking Non-Banking Financial Companies (NBFC-D).


  1. Early identification and reporting of stress
  2. Implementation of Resolution Plan
  3. Implementation Conditions for RP
  4. Delayed Implementation of Resolution Plan


A.   Early identification and reporting of stress:

a. Identification of stress in the borrowal/loan account can be achieved by categorizing all the stressed accounts in the Special Mention Account (SMA) category as defined by RBI based on the default observed in each of the accounts.

b. Stressed accounts are defined by RBI under the guidelines on “Resolution of Stressed Assets – Revised Framework” as under:



Basis for classification –

Principal or interest payment or any other amount wholly or partly overdue between

SMA – 0 1 – 30 days
SMA – 1 31 – 60 days
SMA – 2 61 – 90 days

Further, the latest RBI Guidelines also clarifies that in the case of revolving credit facilities like cash credit, the SMA sub-categories will be as follows:

SMA Sub Categories


Basis for classification –

Outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for a period of:

SMA-1 31-60 days
SMA-2 61-90 days

c. Reporting of Stress to RBI on CRILC Platform by Lenders:As per the guidelines, the Credit Information, including classification of an account as Special Mention Account (SMA)is to be reported by the Banks / Lenders to Central Repository of Information on Large Credits (CRILC), on all borrower entities having Aggregate Exposure (AE) of ˆ 5.00 crore and above.

Monthly Report: The frequency of reporting to CRILC will be as under:

The CRILC – Main Report is to be submitted, by the Bank, on a monthly basis to RBI effective from 01.04.2018.  This is being adhered to by the Bank.The report is to be submitted by the 15th of the succeeding month or as specified by the regulator time to time.

Weekly Report: In addition, the Bank is required to report to CRILC, information of all borrower entities (with AE of ˆ 5.00 crore and above) which are in default, on a weekly basis at the close of business hours on every Friday.  If in case, Friday happens to be a holiday, then the reporting should be done on the preceding working day. This is being adhered to by the Bank.

B. Implementation of Resolution Plan:

As per the RBI directives, all lenders must put in place Board-approved policies for resolution of stressed assets, including the timelines for resolution. Since default with any lender is a lagging indicator of financial stress faced by the borrower, it is expected that the lenders initiate the process of implementing a resolution plan (RP) even before a default. In any case, once a borrower is reported to be in default by any of the lenders,then lenders shall undertake a prima facie review of the borrower account within thirty days from such default (“Review Period”). During this Review Period of thirty days, lenders may decide on the resolution strategy, including the nature of the RP, the approach for implementation of the RP, etc. The lenders may also choose to initiate legal proceedings for insolvency or recovery.

  • In cases where RP is to be implemented, all lenders shall enter into an inter-creditor agreement (ICA), during the above-said Review Period, to provide for ground rules for finalisation and implementation of the RP in respect of borrowers with credit facilities from more than one lender.The ICA shall provide that any decision agreed by lenders representing 75 per cent by value of total outstandingcredit facilities (fund based as well non-fund based) and 60 per cent of lenders by number shall be binding upon all the lenders.
  • The ICA may, inter alia, provide for rights and duties of majority lenders, duties and protection of rights of dissenting lenders, treatment of lenders with priority in cash flows/differential security interest, etc.In particular, the RPs shall provide for payment not less than the liquidation valuedue to the dissenting lenders.
  • Concept of Reference Dates: The reference dates, for the purpose of the policy shall be as under:
S N Type of Advance Aggregate Exposure (AE) Reference Date
1 All Advances ˆ 2000 crore& above 7th June 2019
2 All Advances ˆ 1500 crore& but below ˆ 2000 crore 1st January 2020
3 All Advances Less than ˆ1500 crore To be announced in due course.
  • It is to be noted that in cases where Asset Reconstruction Companies (ARCs), have exposures to the concerned borrower, then they shall also execute / sign the ICA and adhere to all its provisions.
  1. Implementation Conditions for RP:
  • RPs involving restructuring / change in ownership in respect of accounts where the aggregate exposure of lenders is (Rs.100 crore and above) ` 1 billion and above, shall require independent credit evaluation (ICE) of the residual debt. Further, ICEs shall be subject to the following: by credit rating agencies (CRAs) specifically authorised by the Reserve Bank for this purpose. While accounts with aggregate exposure of(Rs.500 crore and above) `5 billion and above shall require two such ICEs, others shall require one ICE. Only such RPs which receives a credit opinion of RP4or better for the residual debt from one or two CRAs, as the case may be, shall be considered for implementation.
  • The CRAs shall be directly engaged by the lenders and the payment of fee for such assignments shall be made by the lenders.
  • If lenders obtain ICE from more than the required number of CRAs, all such ICE opinions shall be RP4 or better for the RP to be considered for implementation.
  • A RP in respect of borrowers to whom the lenders continue to have credit exposure, shall be deemed to be ‘implemented’ only if the following conditions are met:
  • A RP which does not involve restructuring/change in ownership shall be deemed to be implemented only if the borrower is not in default with any of the lenders as on 180th day from the end of the Review Period. Any subsequent default after the 180 day period shall be treated as a fresh default, triggering a fresh review.

(b)  A RP which involves restructuring/change in ownership shall be deemed to be implemented only if all of the following conditions are met:

  1. All related documentation, including execution of necessary agreements between lenders and borrower / creation of security charge / perfection of securities, is completed by the lenders concerned in consonance with the RP being implemented.
  2. The newcapital structure and/orchanges in the terms ofconditionsof the existing loans get duly reflected in the booksofall the lenders and the borrower
  • Borrower is not in default with any ofthe lenders.

(c) A RP which involves lenders exiting the exposure by assigning the exposures to third party or a RP involving recovery action shall be deemed to be implemented only if the exposure to the borrower is fully extinguished.

  1. Delayed Implementation of Resolution Plan:

Where a viable RP in respect of a borrower is not implemented within the timelines given below, all lenders shall make additional provisions as under:

Timeline for implementation ofviable RP Additional provisions to be made as a %of total outstanding, if RP not implemented within thetimeline
180 daysfromthe end of ReviewPeriod 20%
365 days from thecommencement ofReviewPeriod 15% (i.e. totaladditional provisioning of 35%)
  • The additional provisions shall be made over and above the higher of the following, subject to the total provisions held being capped at 100% of total outstanding:

(a) The provisions already held; or,

(b) The provisions required to be made as per the asset classification status of the borrower account.

  • The additional provisions shall be made by all the lenders with exposure to such borrower.The additional provisions shall also be required to be made in cases where the lenders have initiated recovery proceedings, unless the recovery proceedings are fully completed.The above additional provisions may be reversed as under:

(a)Where the RP involves only payment of overdues by the borrower – the additional provisions may be reversed only if the borrower is not in default for a period of 6 months from the date of clearing of the overdues with all the lenders;

(b) Where RP involves restructuring/change in ownership outside IBC – the additional provisions may be reversed upon implementation of the RP;

(c) Where resolution is pursued under IBC – half of the additional provisions made may be reversed on filing of insolvency application and the remaining additional provisions may be reversed upon admission of the borrower into the insolvency resolution process under IBC; or,

(d) Where assignment of debt/recovery proceedings are initiated – the additional provisions may be reversed upon completion of the assignment of debt/recovery

Conclusion:The framework shall not be available for borrower entities in respect of which specific instructions have already been issued or are issued by the Reserve Bank to the banks for initiation of insolvency proceedings under the IBC. Lenders shall pursue such cases as per the specific instructions issued to them. Any action by lenders with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory / enforcement actions as deemed appropriate by the Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary penalties.

           This revised framework will help lending institutions and corporate debtors in reducing their stress burdens which will be a trigger point for boosting the economy of our country. This will create growth environment in the country where there will be win –win situation for the Lenders and corporate debtors.

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *