RBI lays down broad principles for lenders relating to their participation in Government Debt Relief Scheme

The Reserve Bank of India (RBI) has laid down certain broad principles for lenders relating to their participation in Government Debt Relief Scheme (DRS), including sacrifice of interest and/or prinicpal and loan account status.

This comes in the backdrop of States announcing DRS to provide relief to borrowers such as farmers during natural calamities or political parties promising the same for a targeted segment of borrowers in the run up to elections.

The central bank also shared a model operating procedure (MOP) relating to Government DRS with the State Governments. This includes pre-notification consultation with the State Level Bankers’ Committee (SLBC)/ District level Consultative Committee (DCC), funding and design of the scheme.

In respect of relief measures announced prior to the introduction of the aforementioned guidelines, RBI said any dues pending receipt from Government, for more than 90 days will attract specific provision of 100 per cent.

In this regard, lenders have to take necessary action and actively follow up with the respective Governments for settlement of such dues at the earliest.

RBI noted that if such Government DRS’ are announced frequently, incommensurately, or without due consideration to the principles of financial discipline, they would negatively affect credit discipline and in the long run, may be counter-productive to the credit flow to such borrowers.

Apart from the broader implications for the credit discipline and moral hazard issues, DRS also raises certain prudential concerns, which include delay in receipt of dues; mismatch between the claims admitted / submitted by the lenders and accepted by the concerned Government as per the terms of the scheme; mandatory requirement of fresh credit by the lenders, etc.

RBI said given the broader implications of such DRS for the credit culture, while broad based relief measures can be addressed through pure fiscal support in the form of Direct Benefit Transfer (DBT), DRS should be considered only as a measure of last resort when other measures to alleviate financial stress have failed.

Give DRS: Prudential treatment

RBI said lenders may decide on participating in a particular DRS notified by a Government, based on its Board approved policy, subject to the extant regulatory norms.

Any provision of the scheme that may warrant modification in long term interest of the borrowers or for prudential reasons may be duly brought to the notice of the concerned authority/ies through SLBC/ DCC, during the consultation phase while designing the DRS.

Lenders have to clearly determine the eventual outstanding that may crystallise in their books in respect of the borrowers proposed to be covered under the DRS, including the accumulated interest in non-performing accounts. This is to enable the Government to suitably arrange for the extent of fiscal participation.

Lenders have to ensure that the borrowers to be covered under DRS are selected strictly as per terms of such schemes so as to avoid subsequent non-admission by the authorities on technical grounds.

The central bank said the terms and conditions of the DRS as well as the prudential aspects, including cooling period for extending fresh credit, impact on credit score etc., have be clearly communicated to the borrowers at the time of obtaining explicit consent from the borrower for availing benefits under the proposed DRS.

Sacrifice by lenders

Any waiver of accrued but unrealised interest and/ or sacrifice of principal undertaken by lenders in the borrower accounts of beneficiaries of the DRS, either as part of the implementation of the DRS or subsequent to its implementation, will be treated as a compromise settlement, attracting usual provisioning and asset classification norms.

Any fresh credit exposure to such borrowers will be as per the commercial discretion of the lender under relevant internal policy, subject to extant applicable regulations.

RBI said lenders should not create any receivable against the Government on account of the DRS and the exposure will continue to be on the borrower till receipt of funds by them.

Till receipt of funds, lenders will continue to apply the prudential norms including prudential norms on income recognition, asset classification and provisioning. Further, wherever the accounts are non-performing, lenders may pursue recovery measures as per their Board approved policy against such borrowers.

State govts: MOP

As per the MOP, before announcing any DRS, Governments may engage with SLBC/ DCC to evolve a coordinated action plan for conceptualisation, design, and implementation of the DRS.

The schemes should, cover critical aspects of the scheme like identification of borrowers, impact assessment, implementation timelines, resolution of issues concerning settlement of dues by Government to the lending institutions, etc.

DRS’ design features should ensure that they do not impact the financial stability aspects of the region / State or create moral hazards in the borrower segments.

Conformance to relevant regulatory guidelines on loan settlement, reporting to credit information companies etc. should also be taken into account.

RBI noted that detailed budgetary provisions / funding may be provided upfront towards any proposed DRS to fully cover the required settlement amounts.

Where lenders have dues from the Government, pertaining to earlier DRS schemes, new schemes should be announced only on a fully pre-funded basis.

RBI said the DRS should be targeted only at the impacted borrowers and should not contain any restrictive covenant against timely repayments.

Further, it should specify the criteria for determining eligible borrowers on an objective basis, detailed timeline of critical/ material events, including cut-off dates for filing/ submission, acknowledgement, approval and settlement of claims along with compensation clauses for delays in settling the funds, on part of the Government.