A regulatory package was announced previously by RBI as a relief for lenders to mitigate the burden of debt servicing, to stabilize the financial markets and maintain continuity of viable businesses.
RBI had announced a regulatory package previously to mitigate the stress in the financial system amid the COVID-19 crisis. However, these measures were for short term and not permanent solutions. Especially some measures like the moratorium on loan repayment and the halt in the classification of assets were to meet the immediate crisis. As moratorium period reaches its deadline RBI
realised the need for more permanent measures to address the issues caused by the impact of COVID-19.
RBI announced permanent measures to meet the financial stress by the way of “Resolution Framework for COVID related stress. As it is necessary to give equal importance to address immediate stress and long term issues, this framework balances between the two. The highlights of the framework include the sectoral approach in resolution benchmark, a moratorium for two years, prolongation of existing management, more focus on real sector and exclusion of financial service providers.
The new framework is a relief to both lenders and borrowers, as it enables lenders to implement the plan without change of ownership because the change of control will be a trouble for borrowers already affected by the stress of pandemic. Also, finding new owners and implementing the change of control would be more time-consuming.
- The relief is limited to COVID affected customers only and will be eligible under the framework only if also the loans were standard as on March 1, 2020.
- This framework follows a time-bound approach. This process should be invoked by 31 December 2020 and implemented within 90 days of invocation.
- The resolution can be considered as invoked only if the borrower agrees to proceed with the resolution
- An expert committee chaired by Mr K.V Kammath is constituted to recommend the financial parameters that may factor into the assumptions that may go into each resolution plan.
- RBI continues to incentivise collective action by lenders for lenders who do not sign the inter-creditor agreement.
It is assumed that the new resolution framework for COVID relief will provide necessary benefits required to rebuild the sector.
