RBI Retires Debt Recast Schemes

The Reserve Bank of India has scrapped a number of loan-restructuring programmes that banks were using to recast debt, with the Insolvency and Bankruptcy Code having become the main tool to deal with defaulters. It also put strict time limits on the resolution of defaults in a notification issued.

The central bank warned lenders of monetary penalties and higher provisions if they are found to have violated the rules or ‘ever greening’ accounts to escape the stringent new norms on fixing defaults.

Almost all schemes such as corporate debt restructuring, sustainable structuring of stressed assets, strategic debt restructuring and flexible structuring of existing long term project loans have been abolished. The Joint Lenders Forum that was designed to resolve potential bad debts has also been disbanded.

“Any failure on the part of lenders in meeting the prescribed timelines or any actions by lenders with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory, enforcement actions,” the RBI said in a notification. That includes but is “not limited to, higher provisioning on such accounts and monetary penalties”.

The central bank’s action comes after a series of directions to banks, telling them to invoke bankruptcy proceedings against big defaulters under the IBC enacted in 2016. The various restructuring schemes that have been in force for years continued while banks became familiar with the new law. Now that the bankruptcy process appears to be stabilising, the regulator has found it apt to scrap the schemes, which were mostly regarded as having been misused or not being sophisticated enough to deal with the bad loan burden.

RBI has also tightened the reporting of defaults to the Central Repository of Information on Large Credits whenever an account becomes a so-called special mention account, that is, when payment is overdue for more than 30 days.

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