The Reserve Bank of India is looking to introduce a framework for the resolution of stressed assets, in addition to the asset reconstruction company (ARC) route, for which it will soon issue a discussion paper.

The decision has been taken based on market feedback, stakeholder consultations and the recommendations of the Task Force on Development of Secondary Market for Corporate Loans, said the central bank.

The announcement was a part of the Statement on Developmental and Regulatory Policies, released alongside the monetary policy statement on Friday.

This framework for resolution of stressed assets will be similar to that for securitisation of standard assets, which was issued in September 2021, said the RBI.

At present, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFESI) Act 2002 only provides for the securitisation of stressed assets by ARCs.

“Securitisation framework for stressed assets in addition to ARC route will increase the universe of the market participants with more rational pricing,” said Sidharth Rath, MD and CEO of SBM Bank India.

Expected loss approach for loan loss provisions

The RBI also said it is mulling a shift to the ‘expected loss-based approach’ for loan loss provisioning by banks, for which it will shortly issue a discussion paper on the on the various aspects of the transition.

“As a further step towards converging with globally accepted prudential norms, it is proposed to adopt expected loss approach for loss allowances required to be maintained by banks in respect of their exposures,” said the RBI.

It added that this decision is being mulled keeping in mind the “inadequacy of the incurred loss approach for provisioning by banks and its procyclicality”, which amplified the downturn following the financial crisis of 2007-09.

“One of the major elements of the global response to these findings has been a shift to expected credit loss (ECL) regime for provisioning,” said the RBI.

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