RBI toughens Resolution norms for stressed assets

The Reserve Bank of India (RBI) has brought a new Resolution time table for stressed assets under which banks have to start Resolution Plan from day one when the debtor makes default.

As per the upgraded Resolution framework, that is applicable for large debts above Rs 2000 crores exposure, banks will have to completed resolution procedures in 180 days from the date of first default.

The new norm will be applicable from March 1, 2018 onwards. Here, when an asset reports default, the concerned bank should initiate resolution procedures and it should be completed in 180 days. After this, period, the bank should turn to insolvency procedures to wind up the management of the stressed asset. Interestingly as per the current norm, the Special Mention Account norm identifies the repayment status of the debtor under various very short-term periods – say Special Mention Account classification. If the asset doesn’t get the repayment flows in first 30-60 days, it will be classified as SMA1.

Hence, as per the new resolution norm, an asset’s resolution time frame starts from when it is in SMA status itself. The RBI notification on the new resolution procedures issued on Monday, February 12, asks banks to file Insolvency and Bankruptcy Code (IBC) procedures within 15 days of the termination of the 180-day resolution time frame.

The implication of the tough resolution framework is that more assets will come under NPA category. Similarly, banks have to make quick and high provisioning to compensate for the resolution hit assets.

The RBI move will also alter the status of the defaulted loans that are under various restructuring plans like S4A, Strategic Restructuring etc. On bulk of such restructured assets, banks have to initiate resolution procedures.