What The New Bad Loan Resolution Framework May Look Like

The government’s ordinance on non-performing asset resolution, which received President Pranab Mukherjee’s seal of approval is expected to provide a renewed framework on dealing with banking sector stress.

The likely resolution process will involve a time bound structure within which stressed assets have to be resolved. Banks and the concerned company will be asked to come up with a decision within a specific time frame.

If the banks can't act in a timely manner owing to any delays, then a committee, which will have some involvement of the Reserve Bank of India (RBI), will take a final call on the resolution plan for that company. In most cases this would be done through via the bankruptcy code.

The committee may have two or three members including current and former RBI officials. The committee will seek views from rating agencies to decide on the best way to move ahead with an account.

The idea behind the new framework is to resolve 40-50 of the large stressed cases over the next 6-9 months. Once the RBI takes a decision, all banks will be required to adhere to it.

The banking sector regulator has been providing various frameworks on stressed asset resolution over the last three years. Starting with the joint lender forum (JLF) mechanism introduced in 2014, to the formation of a database of large borrowers across banks, the 5/25 refinancing scheme and the strategic debt restructuring scheme in 2015, scheme for sustainable structuring of stressed assets (S4A) and new stressed asset sale guidelines in 2016.

Over the last five years though, the stress in the banking sector has only increased further. As on 31 December 2016, the total gross non-performing assets of the banking system has grown beyond Rs 7 lakh crore.