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In a move that will bring relief to both borrowers and lenders, the Reserve Bank of India (RBI) will enable lenders to implement a resolution plan in respect of eligible corporate exposures — without change in ownership — as well as personal loans, while classifying such exposures as standard assets.
The central bank will provide a window to address Covid-19 related stress under its “Prudential Framework on Resolution of Stressed Assets” (June 7, 2019 circular) that will be subject to specified conditions.
The underlying theme of this resolution window is the preservation of the soundness of the Indian banking sector, RBI Governor Shaktikanta Das said.
The RBI underscored that disruptions caused by Covid-19 have led to heightened financial stress for borrowers across the board. “A large number of firms that otherwise maintain a good track record under existing promoters face the challenge of their debt burden becoming disproportionate, relative to their cash flow generation abilities. This can potentially impact their long-term viability and pose significant financial stability risks if it becomes widespread. Accordingly, it has been decided to provide a window...,” Das said.
Currently, any resolution plan implemented under the Prudential Framework, which involves granting of any concessions on account of financial difficulty of the borrower, entails an asset classification downgrade except when accompanied by a change in ownership, subject to prescribed conditions.
Safeguards
In the light of past experience with regard to use of regulatory forbearance, necessary safeguards for implementing the resolution plan under the window have been incorporated.
The safeguards include prudent entry norms, clearly defined boundary conditions, specific binding covenants, independent validation and strict post-implementation performance monitoring.
The Governor further said the RBI is constituting an Expert Committee chaired by KV Kamath, which will make recommendations on the required financial parameters, along with the sector specific benchmark ranges for such parameters, to be factored into resolution plans.
The Expert Committee will also undertake a process validation of resolution plans for borrowal accounts above a specified threshold.
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