RBI issues framework for revitalising distressed assets in the economy
31 01 2014
(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)
The main proposals of the Framework are:
1. Early formation of a lenders’ committee with timelines to agree to a plan for resolution.
2. Centralised reporting and dissemination of information on large credit.
3. 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.
4. 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.
5. More expensive future borrowing for borrowers who do not co-operate with lenders in resolution.
6. More liberal regulatory treatment provided for asset sales:
· Lenders can spread loss on sale over two years provided loss is fully disclosed.
· Take-out 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.
Going
forward, while some regulatory and governmental measures may be
required to address the factors that are leading to deteriorating asset
quality, there is an equal need for proper credit risk management and
credit discipline among lenders. RBI also stated that this framework
will be fully effective from April 1, 2014. However, in the meanwhile,
banks and specified non-bank lenders should put in place necessary
system and infrastructure to effectively implement the Framework.
Warm regards,
Dr. S P Sharma
Chief Economist
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