Friday, 31 January 2014

RBI issues framework for revitalising distressed assets in the economy

31 01 2014
 DSC_0002

(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)

 outlines a corrective action plan that will incentivise 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. With the slowdown of the Indian economy, a number of companies/projects are under stress. Consequently, the Indian banking system has seen increase in Non-Performing Assets (NPAs) and restructured accounts during the recent years. As the financially distressed assets not only results in producing 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. 

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

No comments:

Post a Comment

EU leaders express concern over US-China trade war  European Union have expressed concern over the intensifying trade friction between ...