In an effort to ease the financial stress on banks amidst economic slowdown, the Reserve Bank of India (RBI) has floated a discussion paper on ‘Early recognition of financial distress, prompt steps for resolution and fair recovery for lenders: framework for revitalizing distressed assets in the economy’. The discussion paper outlines a corrective action plan that will incentivize early identification of problem cases, timely restructuring of accounts, which are considered to be viable, and taking prompt steps by banks for recovery or sale of unviable accounts.
The development comes amidst fear of bad loans hitting a record high of around Rs 2.9 trillion by the end of the fiscal or 4.5% of the total banking assets. Meanwhile, RBI Governor Raghuram Rajan too had earlier expressed his resolve to correct imbalances in the system.
Further, the discussion paper, which is open for public comments till January 1, suggests an early formation of a lenders' committee with timelines to agree to a plan for resolution and incentives for lenders to agree quickly to a plan through 'better regulatory treatment' of stressed assets. On the flip side, it also suggests more expensive borrowing for borrowers who do not co-operate with lenders in resolution. The proposals include an independent evaluation of large value restructuring with a focus on viable plans and fair sharing of losses between promoters and creditors. It also suggests takeout financing/refinancing possible over a longer period, without construing it as restructuring. Apart from the liberal attitude in allowing leveraged buyouts, the proposal encourages sector specific companies and private equity firms to play active role in stressed assets market.
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