The Reserved Bank of India (RBI) has scraped out multiple schemes used by banks to restructure corporate loans and tightened bank loan defaults in a bid to cult out bankruptcy and bad loans in Indian banking sector.

On Monday, the Reserved Bank of India held its sixth bimonthly monetary policy meeting and scraped out the schemes used by banks for restructuring corporate loans and ask loan lenders to comply with a time-bound resolution of loans. The RBI tightened the rules around bank loan defaults in a bid to abolish half a dozen existing loan-restructuring mechanisms. This step was taken by the RBI to accelerate the resolution of bad loans, which has been a major problem in Indian banks and a major reason for a stagnant state of the entire PSU banking sector. The new set of rules are aimed at creating a “harmonised and simplified generic framework” for resolution of stressed assets in view of new bankruptcy regulations.

The RBI has insisted on a time-bound resolution of stressed assets and closer and to implement proper monitoring of high-value loans so that piling of bad loans can be avoided. As per the new rules, cases above Rs 2000 crores will be required to be solved within 180 days. If these norms are followed properly, it can do wonders to for the Indian banking sector and provides confidence to investors to clear up ongoing bad loan exercise. More critically, the central bank has warned wrongdoers among banks that monetary penalties and higher provisions will be imposed if banks resort to ever-greening. This is certainly a clear message to bankers and corporate promoters, who have been fooling the regulator by cleverly using short cuts for a long time.

It also tightened rules around resolution plans, saying any such process involving restructuring or change in ownership for large accounts with loans of 1 billion rupees or more will need independent credit evaluation by credit rating agencies that are authorised by the RBI. All prior schemes including the popular Strategic Debt Restructuring Scheme, the Scheme for Sustainable Structuring of Stressed Assets, and the Corporate Debt Restructuring Scheme will be withdrawn immediately and bad loans will be resolved as soon as possible.

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