RBI’s spl resolution window for Covid-linked stress under prudent framework

The Reserve Bank of India (RBI) has decided to provide a special window under its ‘prudential framework for resolution of stressed assets’ for Covid-related stress, wherein lenders can implement a resolution plan without changing the ownership, while classifying such exposures as ‘standard’.

In a video address post the Monetary Policy Committee’s (MPC) meeting, the Reserve Bank of India Governor said that the move has been announced in a bid to provide relief to stressed companies which have not been able to repay loans due to cash flow issues amid the pandemic.

The prudential framework dated June 7, 2019 provides a principle-based resolution framework for addressing borrower defaults under a normal scenario.

Any resolution plan implemented under the framework which involves granting of any concessions on account of financial difficulty of the borrower entails an asset classification downgrade, except when it is accompanied by a change in ownership, which allows the asset classification to be retained or upgraded to Standard, subject to the prescribed conditions.

Das said: “It has been decided to provide a window under the Prudential Framework to enable the lenders to implement a resolution plan in respect of eligible corporate exposures without change in ownership, and personal loans, while classifying such exposures as Standard subject to specified conditions.”

He noted that the economic fallout on account of the Covid-19 pandemic has led to significant financial stress for a number of borrowers across the board.

The resultant stress can potentially impact the long-term viability of a large number of firms, otherwise having a good track record under the existing promoters due to their debt burden becoming disproportionate, relative to their cash flow generation abilities, the Governor said.

“Such wide spread impact could impair the entire recovery process, posing significant financial stability risks.”

He added that in light of past experiences with regard to use of regulatory forbearances, necessary safeguards are being incorporated, including prudent entry norms, clearly defined boundary conditions, specific binding covenants, independent validation and strict post-implementation performance monitoring.

Das added that given the intent to facilitate revival of real sector activities and mitigate the impact on the ultimate borrowers, the framework shall not be available for exposures to financial sector entities as well as Central and State Governments, local government bodies and a body corporate established by an Act of Parliament or State Legislature.