RBI Discussion Paper on Framework for Revitalising Distressed Assets in the Economy

December 17, 2013:

The Reserve Bank of India has invited Comments on Discussion Paper on ‘Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy’.

The Discussion Paper outlines a corrective action plan that will incentivize early identification of problem cases, timely restructuring of accounts which are considered to be viable, and taking prompt steps by banks for recovery or sale of unviable accounts. The main proposals in the Discussion Paper are summarised below:

Summary of Proposals

Early formation of a lenders’ committee with timelines to agree to a plan for resolution.

Incentives for lenders to agree collectively and quickly to a plan – better regulatory treatment of stressed assets if a resolution plan is underway, accelerated provisioning if no agreement can be reached.

Improvement in current restructuring process: Independent evaluation of large value restructurings mandated, with a focus on viable plans and a fair sharing of losses (and future possible upside) between promoters and creditors.

More expensive future borrowing for borrowers who do not co-operate with lenders in resolution.

More liberal regulatory treatment of asset sales

Lender can spread loss on sale over two years provided loss is fully disclosed.

Takeout financing/refinancing possible over a longer period and will not be construed as restructuring.

Leveraged buyouts will be allowed for specialised entities for acquisition of ‘stressed companies’.

Steps to enable better functioning of Asset Reconstruction Companies mooted.

Sector-specific Companies/Private equity firms encouraged to play active role in stressed assets market.



Background

With the slowdown of the Indian economy, a number of companies/projects are under stress. As a result, the Indian banking system has seen increase in NPAs and restructured accounts during the recent years. Not only do financially distressed assets produce less than economically possible, they also deteriorate quickly in value. Therefore, there is a need to ensure that the banking system recognises financial distress early, takes prompt steps to resolve it, and ensures fair recovery for lenders and investors. ‘Improving the system’s ability to deal with corporate distress and financial institution distress by strengthening real and financial restructuring as well as debt recovery’ has been indicated by the Governor, RBI as one of the five pillars on which Reserve Bank’s developmental measures will be built for improving the financial system over the next few quarters. This Discussion Paper is a step in that direction.

Comments on the Discussion Paper may be sent to the Principal Chief General Manager, Reserve Bank of India, Department of Banking Operations and Development, Central Office, 12th Floor, Central Office Building, Shahid Bhagat Singh Marg, Mumbai-400 001 or emailed by January 1, 2014.

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