RBI 3R”FRAMEWORKFORREVITALIZINGSTRESSEDASSETS

Rectification

In 2015, RBI ordered the Banks to conduct Asset Quality Review (AQR) and begin rectification of bad loans i.e. Bank doesn’t change in Loan Interest, Tenure Or Terms, but asks client to rectify his irregularity in loan-repayment. In genuine case, additional loan may be given. Bank may also try to find a New partner/ Investor for reviving the project.

RESTRUCTURING :

Restructuring is the changing the Loan interest percentage or tenure ownership. For Infrastructure loans: RBI allowed banks to extend infra-loan tenure upto 25 years, and even reduce loan interest rate. But such Interest rate will be reviewed each 5 years.

CDR: Corporate Debt Restructuring: loan can be restructured if 75% of the lenders approve.

STRATEGIC DEBT RESTRUCTURING

Bank’s Debt (Loan) is converted to Equity (Shares with Voting Rights) & bank sells it to highest bidder.  It may alter the company’s ownership.

SCHEME FOR SUSTAINABLE STRUCTURING OF STRESSED ASSETS:

 Only unsustainable portion of Debt (Loan) converted to equity (Preferential Shares without voting rights) & sold off to investors, in such manner that company’s ownership is not change.

5/25 Refinance rule: the window for revival of stressed assets in infrastructure sector and 8 core industries. The lenders are allowed to extend the tenure of loans to 25 years with interest rate adjusted every 5 years so the tenure of the loan matches the gestation period.

RECOVERY

Bank liquidates loan-defaulter’s assets under either of the following acts:

SARFAESI Act 2002 or Insolvency and Bankruptcy Code 2016:

 If 75% of the lenders don’t agree for restructuring / resolution plan, then assets will be liquidated.

SARFAESIACT2002:

The SECURITIZATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST (SARFAESI) ACT, 2002 is a legislation that helps financial institutions to ensure asset quality. This means that the Act was framed to address the problem of NPAs (Non-Performing Assets) or bad assets through different processes and mechanisms.

Following are the main objectives of the SARFAESI Act.

• The Act provides the legal framework for securitization activities in India
• It gives the procedures for the transfer of NPAs to asset reconstruction companies for the reconstruction of the assets.
• The Act enforces the security interest without Court’s intervention.
• The Act gives powers to banks and financial institutions to take over the immovable property that is hypothecated or charged to enforce the recovery of debt.