The Reserve Bank of India (RBI) is set to roll out new norms for the resolution of bad loans and may notify the new circular replacing the earlier February 12 circular as early as this week, three sources in the know told CNBC-TV18.

The guidelines for resolution of stressed loans are ready with the RBI and the regulator will wait for the Model Code of Conduct to lift on May 23rd to make the circular public, sources privy to the developments told CNBC-TV18.

The regulator is expected to retain large portions of the February 12 circular, but do away with some contentious issues, including the one-day default rule that caused a huge outcry from government, borrowers and bankers alike, sources in the know told CNBC-TV18.

The one-day default rule was challenged in court and ultimately led to the quashing of the circular. The Supreme Court had struck down the February 12 circular on April 2 this year, calling it unconstitutional, or "ultra vires", and beyond the scope of the RBI.

Sources pointed that RBI has decided to remove the one-day default rule for initiating resolution exercise, and instead allow at least 30 days time- when the account becomes a Special Mention Account (SMA), for banks to begin the formation of a resolution plan.

This is largely in line with what bankers had suggested, and presented to the RBI through the Indian Banks Association (IBA) on April 10, sources pointed out.

Another relaxation may come in the form of a lower voting threshold requirement for passing a resolution plan, one of the sources quoted above-told CNBC-TV18. Instead of requiring unanimous approval of all banks in the consortium, RBI may lower the voting threshold, and define a voting percentage in its new circular, sources said.

The Supreme Court ruling on RBI's original February 12 circular on bad loan resolution made it very clear that RBI cannot direct banks to take borrowers to the bankruptcy court, but can only exercise its powers under Section 35AA "in respect of specific defaults by specific debtors".

Timely resolution under the overarching theme of Insolvency and Bankruptcy Code was the cornerstone of the February 12 circular, but in light of the Supreme Court order, the RBI would have to do away with mandating banks to take defaulters to National Company Law Tribunal (NCLT), sources explained.

Therefore, in order to incentivise banks to expedite resolution of bad loans, the RBI is likely to adopt a carrot stick approach using provision requirements, said a source, adding that the new circular is likely to introduce higher provisioning as a punitive measure for the delay in resolution by banks.

For instance, the more the delay in resolution, the higher would be the provision requirements, and the quicker the resolution, the lower the provision holding.

In the original circular issued on February 12, 2018, the RBI has asked banks to firm up resolution plans for defaulting borrowers with over Rs 2,000 crore exposure, within one day of delay in loan servicing, and if no resolution was found in 180 days, to send them to bankruptcy court within two weeks time.

First Published:May 21, 2019 10:44 PM IST