NPL Resolution

A non-performing loan (NPL) is the sum of borrowed money upon which the debtor has not made his scheduled payments for at least 90 days. A non-performing loan is either in default or close to being in default.

India's new framework is aimed at speeding up non-performing loan (NPL) resolution. Strong regulatory efforts to clean-up bad loan problems, combined with planned recapitalization of state banks thereafter is a constructive way to resolve this NPL issue.

The new NPL resolution framework is the latest in a series of measures to speed up progress. It gives banks less discretion over the reporting and resolution of bad assets and attempts to address the complexities involved in resolving the stressed loans of large borrowers.

The timeline for dealing with bad loans has also been made prescriptive, with banks and borrowers forced to implement a plan for resolving loans within 180 days of default or go to insolvency court. There are clear instructions on what constitutes an NPL resolution plan and under what circumstances it would be viewed as implemented. Penalties will apply to banks that fail to comply with prescribed timelines or conceal the status of their stressed accounts, suggesting a shift towards lower regulatory tolerance.

The new framework's overall focus is on recognizing and quickly resolving bad loans. It is likely to result in a rise in NPLs, as banks are forced to reclassify stressed accounts previously recorded as special mention loans or restructured loans.

More accounts are also likely to be pushed toward insolvency courts and into liquidation, particularly since the new guidelines require all of a borrower's lenders to agree on a resolution plan to keep it away from the courts.

An increase in liquidation would raise the likelihood of banks taking larger haircuts on bad loans than they expect. Regulatory pressure for banks to recognize bad loans led to pushing up credit costs across the sector, particularly at state banks.

Asset Reconstruction Companies have a dynamic role to play in resolving in such Non Performing Loans.

CFM Assets Reconstruction Private Limited (CFM ARC) is a company licensed by the Reserve Bank of India to provide solutions to companies in stressed situations and resolving Non-Performing Loans and arriving at NPL resolution. CFM ARC has been sponsored by Chartered Finance Management Limited.

Chartered Finance Management Limited (CFML) is a company with over 27 years of track record in Investment Banking & Corporate Advisory services, Debt syndication and placements, Private Equity Advisory, Corporate Restructuring Advisory and Stressed Assets Resolution.

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