The Reserve Bank of India on Friday issued fresh guidelines on bad loan recognition to replace the February 2018 circular struck down by the Supreme Court in April.
On April 2, the top court had declared as ultra vires the notice that directed banks to classify a loan account as stressed if there was even a day of default.
According to the new guidelines, lenders should review accounts within 30 days of default and initiate a resolution plan before the default. The Reserve Bank added that all lenders must follow board-approved policies to deal with bad loans.
The central bank said in its Prudential Framework for Resolution of Stressed Assets that lenders have to recognise “incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts”.
Lenders have to report credit information on all borrowers with an aggregate exposure of Rs 50 million or more. They also have to submit a weekly report on instances of default by such borrowers, the circular added.
According to the guidelines, it is expected of all lenders to initiate the process of implementing a resolution plan even before a default. Before implementing the plan, lenders have to enter into an intercreditor agreement. The agreement will provide rules for the finalisation and implementation of the resolution plan for those with credit facilities from more than one lender.
“Resolution plans shall provide for payment not less than the liquidation value due to the dissenting lenders,” the RBI said, according to Mint.
The guidelines also mention that for accounts with aggregate exposure above a threshold with the lenders, the resolution plan should be implemented within 180 days from the end of the review period. “Lenders shall undertake a prima facie review of the borrower account within thirty days from such default.”
The RBI has allowed lenders who have initiated a resolution plan on June 7 to pursue it under the revised framework and if specified conditions are met.
Reserve Bank of India Governor Shaktikanta Das had said on Thursday that it took the central bank a lot of time to prepare a revised circular as various legal matters had to be examined. “It involved examining various legal issues, it involved very detailed and wide ranging stakeholder consultations, and internally we had to examine it in detail,” IANS had quoted the central bank governor as saying.
The RBI circular from February 2018 asked banks to refer any account with a loan of more than Rs 2,000 crore to bankruptcy court within 180 days of default. The decision caused panic in many companies, in particular those in the power sector. The industry and government tried to push the central bank to relax its regulations, and even approached the Allahabad High Court, which suggested that the government could use Section 7 of the Reserve Bank of India Act to modify the order.
In March, the RBI maintained its stand on all aspects of the revised framework on resolution of stressed assets as per the 2018 order.