Banks now must refer large loan defaulters for insolvency proceedings within strict timelines, the Reserve Bank of India said on Monday, as it abolished all schemes in place to restructure such loans. The central bank revised rules to have a “harmonised and simplified” framework to resolve bad loans, in view of the Insolvency and Bankruptcy Code passed in 2016.

Indian banks, especially the public sector ones, have suffered the past several years with stressed and non-performing loans – loans the banks have little hope to recover from the borrower. This has severely hurt their financial health, prompting the Centre and RBI to tighten rules.

The new system will force lenders to identify and tackle stressed accounts sooner. If they fail to implement a resolution plan for loans within 180 days of the date of default, they must file for insolvency proceedings against firms with total defaults of Rs 2,000 crore or more, the RBI said.

Banks that do not adhere to the timelines will face action, the central bank warned in its notification. RBI-authorised independent credit rating agencies must approve the restructuring or change in ownership of any loan accounts of Rs 100 crore or more.

In the past, the RBI has allowed banks to use several restructuring mechanisms to resolve the problem of bad loans, such as the Strategic Debt Restructuring Scheme, Scheme for Sustainable Structuring of Stressed Assets and the Corporate Debt Restructuring Scheme. The central bank has withdrawn these with immediate effect.

In May 2017, the government passed an ordinance to empower the RBI to tackle the problem of mounting bad loans in India’s banking sector. The RBI then began to use the bankruptcy regulations as a way to solve the problem, as it ordered banks to refer large corporate loan defaulters for insolvency proceedings.