RBI tightens Rules for JLFs
The Reserve Bank of India (RBI) has tightened the rules around making the Joint Lenders’ Forum (JLF) more effective, directing banks not to break any rules and to meet all deadlines. The RBI has said that any breach of rules would attract a monetary penalty.
JLFs are meetings held to revitalise stressed assets. In JLF banks attempt to red-flag stress early and check them by putting in place a corrective action plan (CAP).
JLFs inefficiency basically stems out from the disagreements between lenders.The entire model of JLF is based on the premise that collective action of banks against a borrower for recovery. However, in reality, different lenders have different levels of comfort or discomfort, based on the exposure, collateral, etc. Many lenders have also complained about the lack of transparency in JLF.
As per the new norms, RBI has lowered the threshold needed for implementing the corrective action plan (CAP). Now, the decisions agreed to by a minimum of 60% of creditors by value and 50% of creditors would now be valid to implement the CAP.
Once a decision is reached by the JLF, it would be binding on all other lenders and they must implement it without any additional conditionalities. However, if a lender wants to exit by exercising the substitution option but failed to exit within the given time, it has to go along with the decision taken.
RBI has asked all banks to ensure their representatives on the JLF to be armed with appropriate mandates. It has also asked the executives to take an unambiguous and unconditional stand and vote accordingly. As per the new norms, the executives after taking the decision should be suitably empowered to implement them without necessitating any board approvals.
The CAP can include resolution through the flexible structuring of project loans, change in ownership under strategic debt restructuring or scheme of the sustainable structuring of stressed assets.
Month: Current Affairs - May, 2017