The Reserve Bank of India’s (RBI) revised prudential framework for resolution of stressed assets announced on Friday strikes a fine balance between tight regulatory timelines mandated previously for resolving stressed assets, and inordinate delays that occurred in the past when resolving and provisioning for such assets.

By doing away with mandatory referral of stressed accounts under the Insolvency and Bankruptcy Code (IBC), the new framework puts the onus on banks to devise a suitable resolution plan (RP). It also provides a 30-day review period after default for them to decide on the resolution strategy, including nature and implementation approach (see Table 1).

Table 1: Key changes in the revised prudential framework and their impact

Said Krishnan Sitaraman, Senior Director, Crisil Ratings. “The new prudential framework is a breather for stressed accounts where RPs were under implementation but had to be referred to the IBC because of not being completed in 180 days. One of the key beneficiaries will be stressed power sector assets that were operational and on the verge of being referred to insolvency proceedings under the IBC. These are estimated at ~Rs. 1 lakh crore and banks were staring at significant haircuts on many of these assets.”

To discourage banks from delaying both, the resolution process and the reference to IBC, the prudential framework stipulates additional provisioning of 20-35% in a phased manner (see Table 2) beyond what has already being made in accounts where resolution has been delayed beyond 210 days from default.

But the additional provisioning can be written back either once the RP is implemented or upon filing and admission of the stressed account under IBC. That is an incentive for lenders to go for quick decisions.

Table 2: Timelines for additional provisioning

“The revised framework provides much needed clarity on the way forward in stressed assets resolution after the Supreme Court had annulled the RBI’s previous circular of February 2018. It should help reduce the stockpile of gross non-performing assets (NPAs) further over the medium term,” said Vydianathan Ramaswamy, Associate Director, Crisil Ratings.

NPAs in the banking system have declined in fiscal 2019 to ~9.3% as of March 2019 after tripling to ~11.5% in the four fiscals till March 2018.