Work underway on non-IBC resolution formats 

The much-celebrated June 7, 2019 circular of the “Prudential Framework for Resolving Stressed Assets” is likely to get a facelift. The RBI, according to high-level sources, aims to determine whether some modifications can be made to the circular so that stressed assets can be resolved outside the scope of the insolvency and bankruptcy law, or IBC.

The circular in its present form allows a small window to settle a defaulted loan without taking it to an IBC in its early days. But the resolution by this circular was not a great success. “One notable decision based on the June 7 circular was the DHFL decision. But even there, since the lenders failed to get on the same page, the IBC had to be conjured in the end,” said a banker with knowledge of the matter. “The attempt now is to see if consensus can be achieved between the banks in an easier way so that there can be some way out to resolve the tension without getting into the litigation process.” The circular was intended to resolve the pressure in the banking system in a timely and urgent manner.

point of difference

Banks have announced to the Reserve Bank of India (RBI) that they would welcome the move to reform the circular issued on June 7. However, they are not in favor of taking an ad hoc blow to their financial institution if such an option is adopted. “What is the difference between a direct referral of a borrower to an IBC and a circular recall of June 7 if they both entail provision, although in a slightly different way?” asked a senior executive at a PSU bank.

Noting that one of the main reasons why Covid restructuring works, especially for stressed corporate accounts, is so that the borrower can continue to be classified as a standard account, “For the non-IBC resolution to work, banks need to be allowed that kind of flexibility,” said the banker quoted above. The RBI’s argument, according to the sources, is that it could lead to overheating of the account and ultimately lead to greater stress, such as the scenario carried out in 2015. “The RBI is of the opinion that adequate precautions should be taken,” said the person quoted above. , regardless of the solution method being developed.

It is known that there is a middle path in the works between the regulator and the banks on these operational aspects. With the IBC framework under review, the circular issued on June 7, 2019, can also be reviewed side by side.