The much celebrated June 7 circular of 2019 titled “Prudential framework for resolution of stressed assets” is likely to get a facelift. The intention of RBI, according to highly placed sources, is to determine whether some tweaks can be made to the circular so that stressed assets can be resolved outside the scope of the Insolvency and Bankruptcy Code, or IBC. 

The circular in its current form allows for a little window to resolve a bad loan without taking it to the IBC in its initial days. But resolution through this circular hasn’t been a great success. “One of the high-profile resolutions invoking the June 7 circular was DHFL. But even there, since the lenders failed to come on the same page, IBC had to be evoked eventually,” said a banker aware of the matter. “Now the attempt is to see whether consensus can be achieved between banks in an easier manner so that there could be some way out to resolve the stress without getting into the litigation process”.  The intent of the circular was to resolve the stress in the banking system in a timely and urgent manner.

Point of difference

Banks have put forth to RBI that they would welcome the move to overhaul the June 7 circular. However, they are not in favour of taking a provisioning hit to their financials if such an option is adopted. “What is the difference between directly referring a borrower to IBC and invoking the June 7 circular if both were to entail provisioning, although in a slightly different manner?,” asked a senior executive of a PSU bank.

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Citing that one of the main reasons why Covid restructuring worked, especially for stressed corporate accounts, was that the borrower could continue to be classified as a standard account, “For non-IBC resolution to work, banks need to be allowed this sort of flexibility,” said the banker quoted above. However, the RBI’s contention, according to sources, is that it could lead to the overheating of an account and ultimately result in larger stress, like the scenario that played out in 2015. “The RBI is of the view that adequate provisioning must be taken irrespective of the mode of resolution being worked out,” said the person quoted above. 

It is learnt that a middle path is in the works between the regulator and banks on these operational aspects. With the IBC framework reportedly under review, the June 7, 2019 circular may also be revised in tandem.