NPA Crisis

RBI new bad loan rules may improve prospects of loan recovery


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Strategic debt restructuring, S4A scheme

Mains level: Measures taken by RBI to tackle NPA problem

More stringent laws for resolution of stressed loans

  1. The Reserve Bank of India has withdrawn a host of norms such as strategic debt restructuring (SDR) and scheme for the sustainable structuring of stressed assets (S4A)
  2. It has also made the process time-bound
  3. The new rules stipulate that starting 1 March, lenders must implement a resolution plan within 180 days for accounts of at least Rs2,000 crore

Impact of new rules

  1. The revised rules which call for credit rating agencies to evaluate resolution plans will make the process of restructuring more transparent
  2. They will enable lenders to get better market-linked pricing for the underlying asset
  3. They would also sync bank balance sheets with expected loss from the stressed asset pool
  4. The new rules will improve recovery rates because the failure in meeting timeline will lead to insolvency proceedings, which has to be completed in a maximum of 270 days


Strategic Debt Restructuring

  1. Under SDR, banks who have given loans to a corporate borrower gets the right to convert the full or part of their loans into equity shares in the loan taken company
  2. The SDR gives banks more power in the management of the company who has taken loan and has defaulted
  3. The SDR scheme which was introduced by the RBI in June 2015 thus helps banks recover their loans by taking control of the distressed listed companies
  4. The SDR initiative can be taken by the group of banks or JLF that have given loans to the particular defaulted entity
  5. The Joint Lender Forum (JLF) is a committee comprised of the entire bankers who have given loans to a potentially stressed or stressed borrower

Scheme for the sustainable structuring of stressed assets (S4A)

  1. The S4A Scheme aims at deep financial restructuring of big debted projects by allowing lender (bank) to acquire equity of the stressed project
  2. It is intended to restore the flow of credit to critical sectors including infrastructure
  3. The scheme allows banks to rework stressed loans under the oversight of an external agency
  4. For an account to be eligible for restructuring under the S4A Scheme, the total loans by all institutional lenders in the account should exceed Rs 500 crore (including rupee loans, foreign currency loans/external commercial borrowings)
  5. The project should have started its commercial operations and there should be cash flows from the project

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