Final Contours Of RBI’s New Stressed Asset Circular Remain Under Debate
The Reserve Bank of India (RBI) logo is displayed on the bank’s building in Mumbai, India. (Photographer: Adeel Halim/Bloomberg)

Final Contours Of RBI’s New Stressed Asset Circular Remain Under Debate

The Reserve Bank of India is still debating the final contours of its new stressed asset guidelines, two people with direct knowledge of the matter said. The discussion, which is taking place both internally and within the central board of the Reserve Bank, is centered around the timelines for recognition and resolution of stress, these people said.

The RBI was forced to revisit earlier guidelines issued by it on Feb. 12, 2018, after they were struck down by the Supreme Court. The apex court objected to the blanket rule that all firms with payments overdue by more than 180 days would need to be referred for insolvency.

The RBI is now revisiting two key aspects of the circular—whether lenders should start working on a resolution plan even if payments are overdue by one day and the action to be taken if overdues persist for more than 180 days.

Both these issues remain under discussion.

The point of debate, the people cited earlier said, was the timelines prescribed in the previous iteration of the guidelines. The two people spoke on the condition of anonymity as the discussions are confidential.

The first person cited earlier said that the RBI was still debating the right timeframe within which to begin resolution, in a way which would not hurt banks but would still let the regulator achieve its objective of a rule-based stressed asset framework.

These issues were discussed during the central board meeting of the RBI on Tuesday but a final decision is yet to be taken.

The new guidelines would continue to place the Insolvency and Bankruptcy Code at the centre of the stressed asset resolution process. To incentivise the use of IBC, banks could be asked to maintain higher risk weights on stressed assets where insolvency has not been invoked, said the first person. This could make it very expensive to hold these assets on bank balance sheets without resolution, the person said.

According to the second person cited earlier, the RBI has formed multiple committees to look at various aspects of the stressed asset guidelines and suggest the way forward. These committees are yet to submit their final reports, the person said. Only after the committee reports are in, can the regulator move forward with drafting the final guidelines.

The February 2018 guidelines were brought in to improve the pace at which banks resolve stressed assets. These guidelines were also intended to improve the credit culture in India, where borrowers would often not face any major consequences for delayed payments till the account turned into a non-performing asset. As part of these guidelines, the RBI also withdrew old restructuring guidelines like strategic debt restructuring, scheme for sustainable structuring of stressed assets and 5/25 long term refinancing.

An email was sent to the Reserve Bank of India on Wednesday morning. The story will be updated with any response received.

Also read: RBI To Step Up Supervision Capabilities Through New Division

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