Analysis of framework to revitalize distressed assets

A report on trends in the banking sector issued by the Reserve Bank of India (RBI) on 21 November 2013 put gross non-performing assets (NPAs) of scheduled commercial banks at 3.6% of the gross advances.

In December 2013, the RBI issued a discussion paper titled “Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders”, with a view to increase effi- ciency in monitoring loan accounts. After receiving comments, the RBI introduced a “Framework for Revitalising Distressed Assets in the Economy” for banks and non-banking financial companies (NBFCs) on 30 January 2014.

Based on the framework, the RBI issued specific guidelines for banks on 26 February, titled “Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP)” and for NBFCs on 21 March, titled “Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy”.

These guidelines have introduced an asset classification named “special men- tion account” (SMA). An account is clas- sified as SMA-0 if principal or interest has remained overdue for less than 30 days and the account has shown signs of incipient stress; SMA-1 for a period of 31-60 days; and SMA-2 for 61-90 days. The guidelines require all banks and notified NBFCs to report details of all accounts with aggregate exposure of ₹50 million (US$827,000) and above to the Central Repository of Information on Large Credits (CRILC), which was set up pursuant to these guidelines.

Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Megha Agarwal is an associate at Economic Laws Practice. This ar- ticle is intended for informational purposes and does not constitute a legal opinion or advice.