RBI framework for Revitalising Distressed Assets

RBI released its framework of Revitalising Distressed Assets on January 30, 2014. The Key points are

Firstly, banks must categorise borrowers not paying interest on loans for one month into an SMA 1 or special mention account 1. Loans with interest unpaid for two months must be put in SMA 2. And all loans of over Rs 500 million must be reported to RBI's central repository of information on large credits.

Once, one bank puts a loan in the SMA 2 box, all the lenders to that borrower should form a joint lender forum led by the bank with the largest exposure. The forum must first try to rectify the stress by asking promoters to put in money, sell off non-core assets or get another equity partner.

However, where the lenders forum finds out that rectifying won’t work, they may restructure the loan taking appropriate personal guarantees and collateral. If the forum finds that restructuring won’t work, it may resort to recovering what is left of the asset. The forum has only 30 days to arrive at its solution. For loans above Rs 5.00 billion, the forum must seek advice from an independent evaluation committee to ensure fair restructuring. Loans under restructuring will attract lower provisioning of 5 percent. But if lenders fail to resolve SMA 2 loans early, they have to provide more; 25 percent in the first year, instead of 15 percent currently.

Secondly, RBI allowed banks to refinance existing infrastructure project loans through take-out financing agreements with any financial institution. As per circular even if the revised repayment period is longer than the residual repayment period in the earlier bank's books, the account will not be considered restructured, as long as a proper due diligence has been done by the refinancing bank or institution. 

This framework will be fully effective from April 01, 2014