Reserve Bank of India Resolution Framework for COVID-19 Related Stress
By INSOL India Editorial Team Posted On : August 18, 2020
The economic fallout owing to the COVID-19 pandemic has caused significant financial stress to borrowers. As a result, numerous firms may face risks relating to their viability, and it could also impact their overall financial stability. Therefore, in order to alleviate the stress on the borrowers, the Reserve Bank of India (“RBI”) issued the Resolution Framework for COVID-19 related stress (“Resolution Framework”) on August 6, 2020.
The Resolution Framework acts as a window under the RBI (Prudential Framework for Resolution of Stress Assets) Directions 2019 (“Prudential Framework”), and enables 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’. In this way, the Resolution Framework differs from the routine method under the Prudential Framework, which results in asset classification downgrade, except when accompanied with change in ownership of the borrower. The Resolution Framework is intended for borrowers suffering from financial stress owing to the COVID-19 pandemic, and it is the duty of the lenders to ensure that only such borrowers avail this framework. Borrowers that are not eligible under the Resolution Framework can consider resolution under the Prudential Framework. The reference date for outstanding amount of debt that may be considered for resolution is stated to be March 1, 2020 under the Resolution Framework.
The Resolution Framework is divided into four parts – Part A pertains to resolution of personal loans; Part B concerns resolution of eligible exposures other than those under Part A; Part C prescribes the prudential treatment of exposures covered under the Resolution Framework; and Part D lists disclosure requirements for lenders under this Resolution Framework. The framework provides an exhaustive list of borrowers/ credit facilities that are not eligible under its provisions.
Resolution under both Part A and Part B may be invoked no later than December 31, 2020. However, implementation under Part A must be within 90 days of invocation, while that under Part B must be within 180 days. The Resolution Framework also provides for setting up of an ‘Expert Committee’, to recommend financial parameters necessary to be factored into the assumptions that go into each resolution plan, and the sector-specific benchmark ranges for such parameters.
The Resolution Framework acts as a window under the RBI (Prudential Framework for Resolution of Stress Assets) Directions 2019 (“Prudential Framework”), and enables 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’. In this way, the Resolution Framework differs from the routine method under the Prudential Framework, which results in asset classification downgrade, except when accompanied with change in ownership of the borrower. The Resolution Framework is intended for borrowers suffering from financial stress owing to the COVID-19 pandemic, and it is the duty of the lenders to ensure that only such borrowers avail this framework. Borrowers that are not eligible under the Resolution Framework can consider resolution under the Prudential Framework. The reference date for outstanding amount of debt that may be considered for resolution is stated to be March 1, 2020 under the Resolution Framework.
The Resolution Framework is divided into four parts – Part A pertains to resolution of personal loans; Part B concerns resolution of eligible exposures other than those under Part A; Part C prescribes the prudential treatment of exposures covered under the Resolution Framework; and Part D lists disclosure requirements for lenders under this Resolution Framework. The framework provides an exhaustive list of borrowers/ credit facilities that are not eligible under its provisions.
Resolution under both Part A and Part B may be invoked no later than December 31, 2020. However, implementation under Part A must be within 90 days of invocation, while that under Part B must be within 180 days. The Resolution Framework also provides for setting up of an ‘Expert Committee’, to recommend financial parameters necessary to be factored into the assumptions that go into each resolution plan, and the sector-specific benchmark ranges for such parameters.