Reserve Bank of India tweaks bad loan restructuring rules for lenders

It will be used to avoid high write-downs.

Indian banks can avoid hefty write-downs and provisions with the Reserve Bank of India’s new guidelines on the sustainable structuring of stressed assets.

Under the new optional framework, banks can choose to resolve large stressed accounts by dividing the outstanding debt into sustainable debt and equity/quasi-equity instruments. This move is expected to provide upside to the lenders when the borrower turns around.

“Resolution of large borrowal accounts which are facing severe financial difficulties may require co-ordinated deep financial restructuring which often involves a substantial write-down of debt and/or making large provisions. Often such high write-downs act as a disincentive to lenders to effect a sustainable change in the liability structure of borrows facing stress,” the RBI said in a statement.

The scheme is expected to strengthen the lenders’ ability to deal with stressed assets and to put real assets back on track by providing an avenue for reworking the financial structure of entities which are facing genuine difficulties.