In wake of Indian commercial banks having far exceeded their loss-bearing capacity, microprudential supervision for revival of assets prior to the onset of trouble has donned a veil of urgency. The Reserve Bank of India (RBI) has stressed that in addition to having a spill-over effect on the market, non-performing assets (NPAs) are detrimental to the economy on account of low asset-performance, rapid deterioration and distress caused to lenders and investors.
In terms of the Framework for Revitalization of Stressed Assets, released by the RBI in February 2014, lenders are required to report early signs of stress on an asset, based on the overdue period of principal or interest payment. If the overdue period is 61-90 days and the aggregate exposure is over ₹1 billion (US$15 million), lenders must form a “joint lenders’ forum” and initiate a “corrective action plan”, which includes: (i) rectification (via borrower/promoter commitment to ensure cash flow/infusion of equity); (ii) restructuring; and (iii) recovery of the account as a last resort.
The RBI’s well-intentioned 2014 framework provided a robust initial structure. However, despite the framework, long-term debt financing of infrastructure and core industry projects was still a cause of concern as it required a flexible and longer repayment mechanism, in sync with their unconventionally longer (up to 25-30 years) economic/concession life. Under the framework, to avoid asset-liability mismatch, a repayment period of only eight to 12 years (factoring in the moratorium period) could be extended by lenders, straining the viability of projects and restricting the ability of promoters to generate further investment.
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Nilesh Chandra is an associate partner and Abhinav Mishra is an associate at HSA Advocates. HSA is a full-service ﬁrm with ofﬁces in New Delhi, Mumbai, Bengaluru and Kolkata.
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