Before understanding stressed assets, it is important to first understand NPAs. In terms of Banking Regulations, NPAs result out of the non-payment of interest amount or principal amount for 90 days or more. So beyond that period, the assets are classified as Non-performing but the before the period of 90 days, they are known as stressed assets.

So stressed assets =NPAs+ restructured loans +written off assets.


  • Sub-standard assets- if borrower fails to pay installment, principal amount or interest on principal for period of 90 days the loan become non-performing asset and then it gets termed as Special Mention Assets (SMA). If it remains SMA for a period of 12 months or less then it is termed as sub-standard assets.
  • Doubtful assets- if the sub-standard assets remains sub-standard for a period of 12 months or more, then it would be termed as doubtful assets.
  • Loss assets- if the loan remains sub-standard for more than three years and is still unpaid, then it would be termed as loss assets.
  • Written Off assets- written off assets are those loans on which the bank doesn’t count the money borrower owes to it.

The reserve bank of India (RBI) on February 12, 2018 issued a circular and introduced a revised      framework for resolution of stressed assets by scheduled commercial banks and all India financial institutions, earlier framework was struck down by court in the case of Dharani Sugar and Chemicals limited vs Union of India [Supreme Court, Transferred Case (Civil) No. 66 of 2018 in Transfer Petition (Civil) No. 1399 of 2018 (April 2, 2019)].

In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from 2.3% of total loans in 2008 to 9.3% in 2017. This shows that an increasing proportion of a bank’s assets have ceased to generate income for the bank, lowering the bank’s profitability and its ability to grant further credit. Therefore, measures have been taken to resolve and prevent NPAs which can broadly be classified into two kinds – first, remedial measures for banks prescribed by the RBI for internal restructuring of stressed assets, and second, legislative means of resolving NPAs under various laws (like the Insolvency and Bankruptcy Code, 2016).

Accordingly, after coming into force of IBC, the RBI promulgated framework for restructuring of stressed assets of over Rs 2,000 crores on or after March 1, 2018.  The resolution plan for such restructuring must be unanimously approved by all lenders and implemented within 180 days from the date of the first default.  If the plan is not implemented within the stipulated time period, the stressed assets are required to be referred to the NCLT under IBC within 15 days.  Further, the framework introduced a provision for early identification and categorization of stressed assets before they are classified as NPAs.

Later some of the borrowers, including various power producers and sugar mills, had appealed against the RBI circular in various High Courts. A two-judge bench of the Allahabad High Court in Independent power producers association of India vs. Union of India ruled in favor of the RBI’s powers to issue these guidelines, and refused to grant interim relief to power producers from being taken to the NCLT for bankruptcy. These batch of petitions against the circular were then transferred to the Supreme Court, which issued an order in September 2018 to maintain status quo on the same.

The Court held the circular issued by RBI was outside the scope of the power given to it under Article 35AA of the Banking Regulation (Amendment) Act, 2017.  The Court reasoned that Section 35AA was proposed by the 2017 Act to authorize the RBI to issues directions only in relation to specific cases of default by specific debtors.  It held that the RBI circular issued directions in relation to debtors in general and this was outside their scope of power.  The court also held that consequently all IBC proceedings initiated under the RBI circular are quashed.

Subsequently, RBI vide press release on 4 April, 2019 declared that further necessary actions would be taken for expeditious and effective resolution of stressed assets. Accordingly, RBI on 7 June, 2019 issued Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions, 2019 providing for fresh directions to lenders on the resolution of stressed assets.

The Prudential Framework has been introduced with the aim to strengthen and improve the credit culture and to ensure promotion of strong and resilient financial system in India.

The Prudential Framework is applicable to the following entities:

  • Scheduled commercial banks (excluding regional rural banks);
  • All India term financial institutions (National Bank for Agriculture and Rural Development, National Housing Bank, Export-Import Bank of India and Small Industries Development Bank of India);
  • Small finance banks; and
  • Systemically important non-deposit taking non-banking financial companies (NBFC-ND-SI) and deposit taking non-banking financial companies (NBFC-D) (“NBFCs“).

The Framework would not be applicable in the following events:

  • where the RBI has already issued instructions to banks for initiation of insolvency proceedings against specific borrowers;
  • restructuring of projects under implementation involving deferment of date of commencement of commercial operations; and
  • restructuring of loans in the event of a natural calamity, including asset classification and provisioning.

In addition to the above, the provisions of the Prudential Framework pertaining to the implementation of the Plan, including conditions and delayed implementation in connection therewith, shall not apply to the revival and rehabilitation of micro, small and medium enterprises, which shall continue to be governed by the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises prescribed by the RBI vide its notification dated March 17, 2016.

– Purti Sharma
Associate advocate/Legal coordinator
ASC Solicitors and Advocates

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Stressed assets have been rising rapidly in India, mainly in public sector banks. A number of factors can be identified that have led to this situation. These include global slow down, governance related issues, political factors as well as mal-intentions and misconduct. Consequently, significant losses are incurred by the public as well as the Union Government which basically owns public sector banks. The chances of misconduct are substantially large in case of infrastructure project especially under public private partnership. There is need to take this opportunity to undertake extensive research into the factors which have led to deteriorating asset quality in public sector banks.

A significant rise in non-performing assets (NPAs) of the banking system, especially public sector banks (PSBs), is a matter of concern, and the Reserve Bank of India (RBI), Central Government and commercial banks are trying to address the situation. The global slowdown and uncertain market conditions are generally blamed for the grim banking situation. The general refrain of PSBs is that they operate under constraints, are vulnerable to political pressures, and are not on equal footing with private financial institutions as they have to lend to certain segments of the economy in consideration of social responsibilities. However, the trend in stressed assets reveals that higher NPAs are spread-out across the economy, including priority sector. And major stressed sectors are infrastructure, iron and steel, textiles, aviation and mining. Therefore, it would be interesting to examine important causes and reasons to help in correcting the situation.

 In a slowing economy, it is natural to assume that NPAs will increase but the primary cause of rising NPAs may not only be economic slowdown but also deficiencies in procedures followed in extending and monitoring credit itself as there are significant differences in approaches pursued by PSBs and private sector banks (PVBs). This difference in approach can be easily isolated if a common commodity is considered, illustratively, tractor financing where anecdotally, NPAs in PSBs were nearly 50 percent of the portfolio, a few years ago. In addition, there could be at play still more factors like mal-intentions, and/or misconduct by the borrowers, many a times with connivance of the bank staff.

It is not the first time that stressed assets have increased in the economy. In 1994, India had recorded higher levels of stressed assets as a percentage of total advances than in 2015 but with prudent policy was able to tame them. Similarly, in recent times, having recognized the rising levels of stressed assets and sectors where stress is occurring, India can address the concerns in the banking sector.

Despite several existing schemes and interventions by the Reserve Bank of India (RBI), the problem of bad debt has plagued the Indian banking system. For years, various high value accounts have undergone restructurings that have not resolved stress or the underlying imbalance in the capital structure, or addressed the viability of the business.

The existing RBI stipulated resolution mechanism included corporate debt restructuring (CDR), strategic debt restructuring (SDR), change in ownership outside the strategic debt restructuring (Outside SDR), the scheme for sustainable restructuring of stressed assets, etc. All of these were implemented under the framework of the Joint Lenders’ Forum (JLF).

On February 12, 2018, the RBI decided to completely revamp the guidelines on the resolution of stressed assets and withdrew all its existing guidelines and schemes. The guidelines/framework for JLF was also discontinued.

The New Framework

The new framework requires that as soon as there is a default in a borrower entity’s account with any lender, the lenders shall formulate a resolution plan. This may involve any action, plan or reorganization including change in ownership, restructuring or sale of exposure etc. The resolution plan is to be clearly documented by all the lenders even where there is no change in any terms and conditions.