The Reserve Bank of India (RBI) issued a revised framework for resolution of stressed assets after the Supreme Court struck down its 12 February 2018 circular. The Framework for Resolution of Stressed Accounts (FRESA) provides greater discretion to lenders to decide the resolution plan (RP), which may involve restructuring, sale of exposures and change of management or ownership of the borrower. The new framework covers scheduled commercial banks (SCB), all India financial institutions (AIFI), small finance banks (SFB), and systemically important non-banking finance companies (NBFC).
Special mention accounts (SMAs): The defaulting accounts will be categorized as SMA-0 if the default is between 1-30 days, SMA-1 if the default is between 31-60 days, and SMA-2 if the default is between 61-90 days.
Timelines: A review period of 30 days and a resolution period of 180 days are the two components of the resolution timelines.
The review period starts immediately in the case of borrowers with aggregate exposure of ₹20 billion (US$288 million) and above. In the case of borrowers with aggregate exposure between ₹1.5 billion and ₹20 billion, the review period starts from 1 January 2020. There is no defined timeline as of now for borrowers with aggregate exposure of less than ₹1.5 billion, leaving all small and medium-sized borrowers out of the scope of FRESA. During the review period, the lenders are presumed to have agreed on the RP. The RP has six months for implementation, but it is not a strict deadline. If the deadline has not been met, lenders have to make an additional 20% provision for up to one year from the end of the review period, and 35% provision for the period beyond one year.
Only binding on NBFCs
Though the FRESA is applicable to SCBs, AIFIs, SFBs and NBFCs, the borrower must be reported as being in default by either an SCB, AIFI or SFB for the framework to be triggered. Similarly, only the credit exposures of the SCBs, AIFIs and SFBs are required to be considered for determining the reference date for implementation. The directions have been made applicable to NBFCs only to bind them to the proceedings under the FRESA in case of borrowers that have multiple lenders.