Resolution Plan

A resolution plan is a structured framework designed to address financial distress in firms, particularly within the banking and financial system. In the Indian context, resolution plans have gained prominence as a policy and legal mechanism to restore the viability of stressed assets, protect the interests of creditors, and maintain stability in the broader economy. They are most commonly associated with the insolvency resolution process under Insolvency and Bankruptcy Code, which has transformed the approach to resolving non-performing assets (NPAs) in India.
A resolution plan outlines how a financially distressed borrower can be revived, restructured, or, if revival is not feasible, resolved in a manner that maximises value. Its relevance spans banking operations, financial markets, corporate governance, and macroeconomic performance.

Concept and Meaning of a Resolution Plan

A resolution plan refers to a formal proposal submitted by eligible parties to resolve the insolvency of a corporate debtor. The plan specifies the restructuring of debt, changes in ownership or management, repayment schedules, and operational strategies aimed at restoring solvency. In banking and finance, it represents an alternative to liquidation, prioritising business continuity and value preservation.
From an economic perspective, resolution plans seek to balance creditor recovery with broader systemic stability. By avoiding prolonged defaults and inefficient liquidation, they contribute to the efficient allocation of capital within the economy.

Legal and Institutional Framework in India

The modern resolution framework in India is anchored in the Insolvency and Bankruptcy Code, enacted in 2016. The Code consolidated multiple fragmented laws into a single, time-bound insolvency resolution mechanism.
Key institutional pillars supporting resolution plans include the Reserve Bank of India, which regulates banks and issues prudential guidelines, and the National Company Law Tribunal, which adjudicates corporate insolvency cases. Together, these institutions ensure that resolution plans are legally compliant, financially viable, and aligned with public interest.
The Code mandates that the insolvency resolution process be completed within a fixed timeframe, reinforcing discipline among borrowers and lenders.

Resolution Plans in the Banking Sector

In banking, resolution plans are primarily used to manage stressed assets and NPAs. Banks, as financial intermediaries, face balance sheet stress when borrowers default on loans. Resolution plans enable banks to recover value through restructuring rather than immediate write-offs.
Common banking-related features of resolution plans include:

• Restructuring of loan terms, such as extension of repayment periods or reduction in interest rates.
• Conversion of debt into equity, allowing lenders to participate in future upside.
• Sale of stressed assets to new investors or asset reconstruction companies.

By implementing resolution plans, banks can clean up their balance sheets, improve capital adequacy, and enhance their lending capacity.

Role in Corporate Finance and Financial Markets

Resolution plans play a critical role in corporate finance by facilitating the reorganisation of distressed firms. They often involve renegotiation of financial contracts, infusion of fresh capital, and operational restructuring.
In financial markets, successful resolution plans signal improved credit discipline and risk pricing. Investors gain confidence when insolvency outcomes are predictable and transparent. Over time, this contributes to lower borrowing costs and deeper capital markets.
The emphasis on resolution rather than liquidation also supports entrepreneurship by reducing the stigma associated with business failure.

Economic Significance for the Indian Economy

At the macroeconomic level, resolution plans influence investment, employment, and growth. High levels of NPAs can constrain credit flow, dampen private investment, and slow economic activity. Effective resolution plans address these challenges by unlocking stuck capital and restoring productive use of resources.
For the Indian economy, resolution mechanisms have been particularly significant in infrastructure, power, steel, and manufacturing sectors, where large-scale defaults previously strained the banking system. Timely resolution improves sectoral efficiency and supports long-term growth.
Resolution plans also contribute to fiscal stability by reducing the need for repeated bank recapitalisation using public funds.

Types of Resolution Plans

Resolution plans in India may vary depending on the nature of the distress and the sector involved. Broadly, they can be categorised as:

• Debt restructuring plans, focusing on modifying repayment terms.
• Change-in-control plans, involving new promoters or investors taking over management.
• Hybrid plans, combining financial restructuring with operational turnaround strategies.

Each type aims to maximise the value of the corporate debtor while ensuring equitable treatment of stakeholders.

Advantages of Resolution Plans

Resolution plans offer several advantages within banking and finance. They promote faster recovery of dues compared to traditional recovery mechanisms, reduce litigation, and encourage cooperative behaviour among creditors. By preserving going-concern value, they safeguard jobs and supply chains.
From an economic standpoint, resolution plans strengthen credit culture and improve ease of doing business by providing certainty in distress situations.