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

June 7, 2023
Posted by: OptimizeIAS Team
Category: DPN Topics

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.

Insolvency and Bankruptcy Code, 2016

In simple words it can be said that in case of a default by the equity owners to meet their debt obligations, control is transferred to the creditors and equity owners take a back seat
Initiation of insolvency:
- insolvency resolution process can be initiated by the financial creditor or operational creditor
- Voluntary insolvency proceedings may also be initiated by the defaulting company, its employees or shareholders
- Once the resolution process begins, for the entire period, a moratorium is ordered by the NCLT on any judicial proceedings against debtor, no enforcement of securities, sale or transfer of assets or termination of essential contracts against the debtor.
Resolution professional has to work under guidance of Committee of Creditors (CoC)
The IBC framework includes following:
- IBBI (Insolvency & Bankruptcy Board of India) as the regulating authority
- Insolvency professionals (to act as intermediary and help sick units and financial institutions including banks with a smooth takeover or liquidation process)
- Information utilities (credit information storing units), and
- Adjudicatory mechanisms, to facilitate a time bound insolvency resolution procedure and liquidation if necessary.