India: RBI Issues Revised Prudential Framework For Resolution Of Stressed Assets

Last Updated: 11 June 2019
Article by Kumar Saurabh Singh, Kartick Maheshwari, Aditi Bagri and Hemant Kothari

Most Read Contributor in India, July 2019

The Reserve Bank of India (RBI) issued a revised prudential framework for resolution of stressed assets on 7 June 2019 (Revised Circular) in supersession of the erstwhile circular on Resolution of Stressed Assets dated 12 February 2019 (Feb 12 Circular) which was struck down by the Hon'ble Supreme Court on 2 April 2019.

The Supreme Court had found fault with the Feb 12 Circular primarily on the ground that a universal and mandatory reference of accounts to proceedings under the insolvency code where the aggregate exposure was greater than INR 2000 crores and where the resolution was not implemented within 180 days, was ultra vires the powers of RBI. However, the Court held that such reference of defaulting borrower can be directed by RBI on a case-to-case basis having regard to the specific defaults.

After the Supreme Court judgment, the RBI at the time of issuance of the Revised Circular also issued a press release clarifying that in the purpose clause of the Revised Circular that "Notwithstanding anything contained in this framework (i.e. the Revised Circular), wherever necessary, RBI will issue directions to banks for initiation of insolvency proceedings against borrowers for specific defaults so that the momentum towards effective resolution remains uncompromised."

As such, it is noteworthy that apart from the operation of the Revised Circular (summarized below), the RBI has reserved its power to issue specific directions to banks/financial institutions to refer a defaulting borrower to the resolution process under IBC in terms of Section 35AA of the Banking Regulation Act 1849.


The Revised Circular applies to Scheduled Commercial Banks (SCB), All India Term Financial Institutions (AITFI), Small Finance Banks (SFB), NBFC-ND-SI and NBFC-D. It is not applicable to regional rural banks, FCCB holders etc.

Resolution Plan

Lenders are required to adopt a board approved policy for resolution of stressed assets with timelines for resolution. This policy is required to outline the signs of financial difficulty and set out qualitative and quantitative criteria for determination of such financial difficulty. 

Pre-emptive measures i.e. active steps to initiate and implement a resolution plan even before a default has actually occurred are expected of lenders. In case a default has occurred, and the lender is a SCB, SFB or AITFI, they are required to undertake a review of the borrower within 30 days of such default (Review Period).

A resolution plan (RP) under the Revised Circular is required to be implemented within 180 days from the end of the Review Period - if the lenders have decided to pursue a restructuring (rather than a reference to insolvency proceedings under the IBC) . A Review Period will commence on the earlier of the reference date (if the Borrower has defaulted on or before the reference date) or on the date of first default after the reference date. The reference dates are as per the below:

Aggregate exposure of the Borrower to SCBs, SFBs and AITFI Reference Date
INR 20 billion and above 7 June 2019
INR 15 billion up to INR 20 billion 1 January 2020
Less than INR 15 billion To be announced by RBI

Implementation of RP

For the implementation of a RP, all lenders (including any asset reconstruction companies) are required to enter into an inter-creditor agreement (ICA) during the Review Period. All decisions under the ICA, when made with the consent of 75% by value of the total outstanding credit facilities (fund based and non-fund based) and 60% of lenders by number will binding all lenders. Any dissenting lenders under the RP are required to be paid at least the amount which they would receive on liquidation.

Several conditions have been stipulated for implementation of a RP. One of the key conditions is an independent credit evaluation (ICE) by credit rating agencies (CRAs) specifically approved by RBI.

A list of ICE symbols and their description has been set out in the Revised Circular for rating the RPs. Only those RPs which have a credit rating of RP4 for the residual debt will be considered for implementation. The onus and cost for appointing CRAs has now been imposed on the lenders.

Aggregate Exposure CRAs
INR 5 billion or above 2 ICE
INR 1 billion or above 1 ICE

An RP will be deemed to have been implemented, only if the following conditions are met:

  • where there is no restructuring / change in ownership under the RP: if the borrower has not defaulted with any of its lenders as on the 180th day from the end of the Review Period.
  • where there is a restructuring / change in ownership: (i) when all documents (including as regards security creation and perfection) are duly executed between the parties; (ii) the new capital structure is reflected in the books of both, the lender and the borrower; and (iii) the borrower is not in default with any lenders.
  • where the RP involves an assignment of exposures / recovery action: the exposure to the borrower is fully extinguished.

Prudential norms

Assets which are classified as "standard", will immediately be downgraded to NPA in case of a restructuring. NPAs will continue to have the same asset classification as they had pre-restructuring. Conditions for upgrade of accounts from NPA to standard have been provided in the Revised Circular. Accounts where lenders have an aggregate exposure of INR 5 billion or more, require at least 2 CRAs providing investment grade credit ratings and for exposures of INR 1 billion and up to INR billion, an investment grade credit rating from at least 1 CRA.

However, concessions have been made for provisioning where insolvency proceedings are initiated under IBC. The Revised Circular provides for a "freeze" on provisioning for the earlier of (i) a period of 6 months from the date of submission of a RP; or (ii) 90 days from the date of approval of the RP under the IBC. During this freeze period, lenders cannot reverse additional provisioning made, but will be required to make additional provisions to the extent of the shortfall. The "freeze" on provisioning will lapse if a RP is rejected. Specific provisioning norms have also been stipulated for additional and interim financing availed by any debtors.

The Revised Circular provides for additional provisioning (capped at 100% provisioning being made) to be made by all lenders for non-implementation of a viable RP, in addition to the provisions already made / required to be made based on the asset classification status of the borrower account.

Timeline for implementation Additional provision
180 days from the end of the Review Period 20%
365 days from the commencement of the Review Period 15% (i.e. a total additional provisioning of 35%)

The above additional provisioning is to be made in all cases where recovery proceedings have been initiated by the lenders but not been fully completed. Further, where (i) the borrower defaults on any of the credit facilities after an upgrade to its asset classification, but before the "specified period" (being the period commencing on the date on which the RP is implemented and until payment of 20% of the outstanding principal debt as per the RP and interest capitalization sanctioned, if any,); or (ii) does not perform satisfactorily in the  "monitoring period" (being the period commencing from the date of implementation of the RP up to the date by which at least 10% of the sum of the outstanding principal debt under the RP and interest capitalisation as part of the restructuring, if any, is repaid)  then the lenders are required to make an additional provisions of 15% for such accounts at the end of the Review Period.

However, these additional provisions can be reversed, subject to compliance with certain conditions for each type of resolution e.g. payment of overdues / restructuring / change in ownership / IBC / assignment of debt, etc. and depending on whether their asset classification is upgraded. Further, the upgradation of asset classification, specifically, in case of a change in ownership is also subject to conditions such as (i) the acquirer not being disqualified under S. 29A of the IBC; (ii) the new promoter holding at least 26% of the paid up equity share capital and voting rights of the borrower and being its single largest shareholder; (iii) new promoter being in "control", etc.

The Revised Circular also sets out principles for classification of sale and lease back transactions as restructuring.

Income recognition

The mechanism for income recognition as regards interest payments is as set out below:

Interest Income Recognition
Restructured Account – Standard Asset Accrual basis
Restructured Account – NPA Cash basis
Additional Finance – NPA pre-restructuring Cash basis
Additional Finance – Restructuring with change in ownership Cash/ Accrual basis

Any unrealized income represented by a funded interest term loan / debt / equity instrument will have a corresponding credit in a specific account created in this regard, being the "sundry liabilities account (interest capitalization)".


Borrowings / export advances availed from lenders who are part of the Indian banking system or with the support of the Indian banking system in the form of guarantees, SBLCs, letters of comfort, etc. which are used for repayment / refinancing of loans denominated in the same or different currency will be considered as "restructuring" under the Revised Circular, if the borrower is in financial difficulty. The determination of whether or not the borrower is in financial difficulty, will be on the basis of the policy approved by the Board of the respective lenders. 


Lenders are required to make disclosures in the notes to accounts of their financial statements as regards RPs implemented. Further, the statutory auditors are required to specifically examine, if the valuation of the instruments (debt, quasi debt, equity instruments) subscribed by the lenders adequately reflect the risk of loss associated with such instruments.


The much-awaited Revised Circular has filled the void in the pre-IBC framework for resolution of stressed assets in India which existed after the Supreme Court order on Feb 12 Circular.

The Revised Circular has moved away from the position under Feb 12 Circular by not prescribing for mandatory insolvency on account of failure to implement a resolution plan in a time bound manner. At the same time the Revised Circular requires banks and financial institutions in India to act promptly for resolution of accounts in 'financial difficulty' while leaving the decision making for terms of resolution entirely in the hands of lenders or in the alternate risk making higher provisioning on their accounts. As the universal reference to the IBC in Feb 12 Circular was struck down by the Supreme Court in its entirety, the RBI has cautiously inserted a reference to Section 35AA of the Banking Regulation Act, 1949, clarifying its ability to issue directions for initiation of insolvency proceedings borrowers in specific cases.

A key aspect introduced under the Revised Circular is the governance of all creditor relationships through the ICA. Lenders will be able to develop their own governance framework for tabling proposals, voting mechanisms, rights and duties of majority lenders, protection of rights of minority lenders etc., in restructuring cases. This arrangement would however not cover foreign lenders i.e. ECB lenders, bond holders etc. who would have to agree on a pre-IBC restructuring on a consensual basis. To that extent, the right of foreign lenders to decide on a resolution plan through pre-IBC or through a formal insolvency framework remains unaffected on account of the Revised Circular.

On another key aspect of resolution involving accounting treatment of instruments issued on account of restructuring/ conversion of unsustainable debt i.e. equity shares, preference shares, zero coupon bond etc. a key principle that has been set out by the RBI is that the valuation of instruments should be done on a conservative assessment of the cash flows with appropriate discount rates to reflect the stressed cashflows of the borrower. The impact of these valuation methodologies and the provisioning norms introduced through the Revised Circular on the books of accounts of various lenders will need to be tested over time.

Overall the Revised Circular strikes a fine balance between the requirement to have a framework for prompt corrective action by lenders in accounts facing financial difficulty and providing regulatory disincentives on one hand and on the other leaving the decision making in individual accounts to the joint decision making process amongst lenders who are best placed to determine the value and the stakeholders to deal with. This is a welcome move and is expected to ensure that the momentum towards effective resolution remains uncompromised and at the same time preserves value erosion which can happen on account of mandatory insolvency process.

It is also expected that the additional time available with the lenders on account of the new timelines for resolution would lead to more resolutions of large value accounts without invoking the insolvency process. . This is an indicator of a maturing distressed debt market with a robust insolvency and pre-insolvency asset resolution framework which can create a win-win situation for all the stakeholders involved.

The above being said, there are a few items where the Revised Circular does not optimally fill the gap, and for which careful strategic planning may be required:

  • It does not address the issue of a lender who wishes to rock the boat and file independent IBC proceedings in the pendency of the implementation period of the restructuring plan (or the Review Period). Perhaps, the solution for this will be via judges applying a common-sense interpretation and imposing a "moratorium" on IBC proceedings – while the lenders try implement a restructuring (assuming they have the requisite majority to push ahead with an ICA). While we certainly expect some litigation in this regard, we do expect (i) courts to facilitate a restructuring under the Revised Circular, and prevent dissenting lenders from frustrating the objectives of the Revised Circular i.e. uphold a sensible time line / process toward a flexible restructuring over an insolvency; and (ii) the standard-form ICAs to appropriately rein in dissenting domestic lenders in India; and
  • The restructuring of debt of listed companies in terms of the Revised Circular involving issue of equity shares or other convertible instruments in favour of local banks will enjoy certain exemptions from SEBI prescribed pricing on preferential allotment and mandatory tender offer requirements. However, the same benefit in case of issue of new capital / change of control (pursuant to an approved restructuring) will not be made available to other strategic and financial investors.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions