Resolution ecosystem to get a fillip with new rules

The RBI is working to establish necessary recognition and resolution measures and is working on the proposed securitisation of stressed assets framework, which will play a crucial role in effectively dealing with rising non-performing assets (NPAs).

Securitisation of NPAs is a financial structure whereby an originator of non-performing assets sells these to a special purpose entity (SPE) that funds such an acquisition by issuing debt securities. Stressed assets, which include NPA and special mention accounts (SMA) with incipient stress, have adverse implications for the economy, the RBI said in its annual report.

Stressed assets tie up capital, hinder credit creation, impose costs on financial institutions, and may lead to inefficient allocation of resources.

According to the RBI’s Annual Report, securitisation of stressed assets can effectively address the issues of timeliness and unlocking fair value. This is because it involves a diverse group of experts, such as servicers and resolution managers, who bring different skills and knowledge to the process.

By including these experts, a wide range of investors with varying risk appetites can participate, leading to a better distribution of credit and recovery risk. This approach also ensures the marketability of the securitisation notes and helps build economic resilience against future shocks.

The involvement of resolution and recovery experts ensures the marketability of securitisation notes and better distribution of credit and recovery risk. This approach enhances economic resilience against shocks.RBI is suggesting a way to securitise NPAs similar to how regular assets are securitised. However, this mechanism is not meant to replace the current methods of resolving NPAs, such as using Asset Reconstruction Companies (ARCs), but rather to exist alongside them as an alternative option. This proposal may also offer ARCs additional opportunities to be involved as resolution managers, RBI said in the report.

RBI governor Shaktikanta Das, in his speech on May 29 on Governance in Banks: Driving Sustainable Growth and Stability, said that during the course of the supervisory process, RBI has discovered instances where banks used innovative methods to conceal the true status of stressed loans.

These methods included bringing two lenders together to evergreen each other’s loans, structured deals with stressed borrowers to hide the stress, and the use of internal or office accounts to adjust repayment obligations. Such practices raise concerns about the interest served by these methods, and the RBI governor mentioned these instances to raise awareness and encourage vigilance against such practices.