PROJECT

FINANCE             2018-04-03

Loan Default – the New Paradigm Shift

This framework is more outcome-oriented and leaves considerable flexibility to banks to determine the process as well as the contours of the restructuring plan

Loan Default – the New Paradigm Shift

The new framework for resolution of stressed assets outlined in the Reserve Bank India’s circular of February 12, 2018 is prompted by the IBC which is a comprehensive and time-bound framework for dealing with corporate stress.

Unlike the earlier frameworks, this is more outcome-oriented and leaves considerable flexibility to banks to determine the process as well as the contours of the restructuring plan. The revised framework removes various process and input constraints which were embedded in the earlier regulatory schemes for restructuring. Instead it provides as much flexibility as possible to lenders and the stressed borrowers so long as a credible resolution plan is implemented within a specified timeframe. If lenders and the stressed borrowers are unable to put in place a credible resolution plan within the timelines, then the structured insolvency resolution process under the IBC should take over.

In respect of accounts with aggregate exposure of the lenders at Rs.20 billion and above, resolution planshall be implemented within180 days from the date of filing such default.  If a resolution plan in respect of such large accounts is not implemented as per the timelines, lenders shall file insolvency application, singly or jointly, under the Insolvency and Bankruptcy Code 2016 (IBC) within 15 days from the expiry of the said timeline.

Withdrawal of extant instructions

The extant instructions on resolution of stressed assets such as, Corporate Debt Restructuring Scheme (CDR), Strategic Debt Restructuring Scheme (SDR), and Scheme for Sustainable Structuring of Stressed Assets (S4A) stand withdrawn. Accordingly, the Joint Lenders’ Forum (JLF) as an institutional mechanism for resolution of stressed accounts also stands discontinued. All accounts, including such accounts where any of the schemes have been invoked but not yet implemented, shall be governed by the revised framework