Tuhin Kanta Pandey, the Secretary of the Department of Investment and Public Asset Management (DIPAM), recently made a statement regarding the Reserve Bank of India’s (RBI) new framework for the resolution of stressed assets. He mentioned that the RBI had followed a consultative process and issued draft guidelines before notifying the final framework. This move by the RBI has been welcomed by the industry and is seen as a positive step towards resolving the issue of stressed assets in the Indian banking sector.
The RBI’s new framework for the resolution of stressed assets is a much-needed measure to address the growing problem of non-performing assets (NPAs) in the banking sector. It is estimated that the total NPAs in the Indian banking system amount to a staggering Rs 10 lakh crore. This has not only affected the profitability of banks but has also hampered their ability to lend and support economic growth.
The draft guidelines for the resolution of stressed assets were first issued by the RBI in June 2019. The guidelines were open for public comments and the RBI received valuable feedback from various stakeholders, including banks, asset reconstruction companies, and industry bodies. After carefully considering all the suggestions, the RBI notified the final framework in August 2020.
The new framework provides a more structured and time-bound process for the resolution of stressed assets. It classifies stressed assets into three categories – special mention accounts (SMA), default, and non-performing assets (NPA). The framework also lays down strict timelines for the resolution process, with a maximum of 180 days for the resolution of NPAs. This will not only help in faster resolution of stressed assets but will also prevent them from turning into NPAs.
One of the key features of the new framework is the introduction of a five-pronged resolution approach, namely – mild restructuring, asset management companies (AMCs), alternative investment funds (AIFs), resolution through the Insolvency and Bankruptcy Code (IBC), and lastly, asset reconstruction companies (ARCs). This multi-pronged approach will provide banks with a range of options to choose from, depending on the nature and severity of the stressed asset.
The new framework also addresses the issue of evergreening of loans, which has been a major concern in the past. Evergreening refers to the practice of providing new loans to a borrower to repay the existing loans, without addressing the underlying issues. The RBI has now made it mandatory for banks to make provisions for loans that are restructured under the mild restructuring approach. This will discourage banks from evergreening loans and ensure that the resolution process is carried out in a transparent and effective manner.
The RBI’s new framework has also been praised for its focus on the role of external agencies in the resolution process. The involvement of external agencies such as AMCs, AIFs, and ARCs will not only bring in specialized expertise but will also help in reducing the burden on banks. This will allow banks to focus on their core activities of lending and supporting economic growth.
Tuhin Kanta Pandey’s statement regarding the RBI’s new framework is a testament to the government’s commitment towards resolving the issue of stressed assets. The government has been taking various steps to address the issue, including the recapitalization of banks and the introduction of the IBC. The new framework will further strengthen the government’s efforts and will go a long way in reviving the health of the banking sector.
The industry has also welcomed the new framework, with many experts stating that it will bring in more transparency and efficiency in the resolution process. The timely resolution of stressed assets will not only improve the financial health of banks but will also have a positive impact on the overall economy. It will free up much-needed capital for banks to lend and support economic growth, which is crucial in these challenging times.
In conclusion, the RBI’s new framework for the resolution of stressed assets is a well-thought-out and comprehensive measure to address the issue of NPAs in the banking sector. The consultative process followed by the RBI in formulating the guidelines is commendable and shows the regulator’s commitment towards addressing the concerns of all stakeholders. With the new framework in place, we can hope for a healthier and more resilient banking sector, which will play a crucial role in driving India’s economic growth.
