Prudential Framework for Resolution of Stressed assets (resolution outside IBC)

Prudential Framework for Resolution of Stressed assets (resolution outside IBC)

Subject: Economy

Section: Monetary Policy

The enactment of IBC and the default event being the trigger for initiating insolvency proceedings under the statute forced a rethink of the regulatory trigger for mandatory resolution as well. All the prevailing schemes for restructuring were replaced with a simple and harmonised Prudential Framework for Resolution of Stressed Assets (Prudential Framework) which was issued on June 7, 2019.

The Prudential Framework takes a different approach from IBC:

• It prioritizes incentive structures over compulsory initiation of insolvency against large borrowers.
• Instead of compelling lenders to initiate insolvency proceedings within a certain timeline, the Prudential Framework instead provides a system of disincentives in the form of:
  • Additional provisioning for delay in implementation of resolution plan (“Plan“) or
  • The initiation of insolvency proceedings.

The original framework did not give expected results, as was seen in case of DHFL where in the end IBC had to be invoked after no no consensus was reached by lenders. Now the Prudential Framework is likely to be overhauled.

Key points:

• Banks are not interested in any alternative to IBC if it still requires them to have the same level of provisioning as in IBC.
• Banks want more flexibility on the lines of restructuring during Covid pandemic where the distressed loans continued to be classified as standard assets.
• RBI feels any relaxation of provisioning or classification norm may ultimately result in greater stresses in the system.
• Middle path is likely to be explored, with the IBC framework also to be reviewed soon.