In a relief to banks trying to resolve large stressed accounts within strict timelines, the Reserve Bank of India today tweaked rules for bad loan recognition, acknowledging the problems caused by the lockdown..

Among the relaxations, the period for implementing resolution plans has been extended by 90 days. This gives banks more time to formulate plans and also avoid setting aside more money in penalty for delays.

“ Recognizing the challenges to resolution of stressed assets in the current volatile environment, it has been decided that the period for resolution plan shall be extended by 90 days,” RBI Governor Shaktikanta Das today said.

What existing bad loan rules say

RBI’s “Prudential Framework for Resolution of Stressed Assets”, or the “June 7 circular” as it is more popularly called, requires banks to implement resolution plans for large defaulters within 210 days, if they are to avoid penal provisions. This timeline includes 30 days allowed under “review period” when a borrower first defaults and the subsequent 180-days for implementing a resolution plan.

If banks fail to adhere to this time limit, they have to hold higher provisioning of 20 percent as a punitive measure, and another 15 percent on top of the additional 20 percent if the resolution is stalled for over 365 days. This is applicable for all large accounts which have a system-wide exposure of over Rs 2,000 crores effective June 2019 and for all accounts over Rs 1,500 crore effective January 2020.

Relaxations to the rules

To allow banks some leeway given current operating challenges, the RBI has decided that for accounts within the Review Period as on March 1, 2020, the period from March 1-May 30 will be excluded from the calculation of the 30-day timeline for the Review Period.

The residual Review Period will then resume from June 1, 2020, after expiry of which the lenders will have the usual 180 days for resolution.

For accounts where the Review Period was over, but the 180-day resolution period had not expired as on March 1, 2020, the timeline for resolution has been extended by 90 days from the date on which the 180-day period was originally set to expire.

This also means that the requirement to set aside the additional 20 percent will also not apply before the end of the extended time period, RBI said.

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