Which NPA Schemes are Scrapped by RBI? RBI Orders Overhaul of Bank NPA Cleanup (Important) (Download PDF)


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The Reserve Bank of India (RBI) announced overhaul of the stressed asset resolution framework by immediately withdrawing existing schemes and asking lenders to resolve defaults within 180 days.

Image of NPA Schemes

Image of NPA Schemes

Image of NPA Schemes

Key Points in RBI Feb 2018 Order

  • Warned lenders of “stringent supervisory” if they take any action with an intent to conceal the actual status of the accounts.

  • Asked lenders to identify stress in loan accounts immediately on default and classifying stressed assets as special mention accounts (SMA).

  • Once a lender identifies a default, all lenders − singly or jointly − will be initiating steps to cure the default.

  • A 180-day timeline for stressed asset resolution for all lenders for the accounts having exposure of more than Rs. 20 billion (Rs 2, 000 crore) beginning March 1, 2018

  • Lenders failing to resolve the stressed account within the 180-day deadline are required to file insolvency application, singly or jointly, under the IBC within 15 days of the deadline.

  • Lenders are required to establish that the acquirer of the stressed asset under the insolvency is not a person disqualified under the Section 29A of the IBC law.

What is a NPA?

  • A nonperforming asset (NPA) refers to a classification for loans on the books of financial Institutions that are in default or are in arrears on scheduled payments of principal or interest.

  • Debt is classified as nonperforming usually when loan payments have not been made for 90 days.

    Amount of elapsed time may be shorter or longer depending on the terms and conditions in each loan.

Effects of NPA

Carrying nonperforming assets also referred to as nonperforming loans, on the balance sheet places following burdens on lenders.

  1. The nonpayment of interest or principal reduces cash flow for the lender disrupting budgets and decrease earnings.

  2. Loan loss provisions set aside to cover potential losses reduce the capital available to provide subsequent loans- Once the actual losses from defaulted loans are determined, they are written off against earnings.

  3. The most important implication of the NPA is that a bank can neither credit the income nor debit to loss, unless either recovered or identified as loss. If a borrower has multiple accounts, all accounts would be considered NPA if one account becomes NPA.

Schemes Scrapped by RBI

Image of Schemes Scrapped by RBI

Image of Schemes Scrapped by RBI

Image of Schemes Scrapped by RBI

  • Framework for Revitalising Distressed Assets: The Framework outlines a corrective action plan to incentivize early identification of problem cases, timely restructuring of accounts that are considered viable, and taking prompt steps by banks for recovery or sale of unviable accounts.

  • Corporate Debt Restructuring Scheme: “CDR” mechanism is voluntary non-statutory mechanism under which financial institutions and banks work together to restructure the debt.

  • Flexible Structuring of Existing Long Term Project Loans: Allows refinancing old loans, even without a pre-determined agreement with other Banks Financial Institutions (FIs) and fix a long repayment period, without treating the same as restructuring.

  • Strategic Debt Restructuring Scheme (SDR) : Banks are made as majority owners and they will replace the existing management of the ailing company.

  • Change in Ownership Outside SDR: Banks can consider change in ownership only if the change in management will improve the financial position of the company.

  • Scheme for Sustainable Structuring of Stressed Assets (S4A) : Large ticket loans are restructured by separating a sustainable loan from an unsustainable loan:

    • Lenders are required to make this classification.

    • Sustainable level of debt can be serviced with its current cash flows.

    • Sustainable level of debt should not be less than half the loans or funded liabilities of the stressed entity.

    • Banks can convert the unsustainable debt into equity or equity related instruments expected to provide upside in case the borrower cannot follow the arrangement.

  • Joint Lenders’ Forum (JLF) : Joint Lender’s Forum is a dedicated grouping of lender banks formed to hasten decisions when an asset (loan) of more than Rs. 100 crore becomes stressed.

- Published/Last Modified on: April 4, 2018


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