Why in News:

• The prospect of recovering ₹3.8 lakh crore of stressed loans of over 70 large borrowers has become uncertain after the Supreme Court (SC) quashed the controversial February 12, 2018 circular of the Reserve Bank of India (RBI) on resolution of stressed assets.

Details:

• The central bank’s controversial ‘February 12 circular’ which tightened the framework for the resolution of stressed assets has been struck down by the Supreme Court. What was the Reserve Bank of India’s (RBI’s) so-called “February 12 circular”?
• Through a notification issued on February 12, 2018, when Urjit Patel was Governor, the RBI laid down a revised framework for the resolution of stressed assets, which replaced all its earlier instructions on the subject. Banks were required to immediately start working on a resolution plan for accounts over Rs 2,000 crore, which was to be finalised within 180 days.In case of non-implementation, lenders were required to file an insolvency application, according to rating agency of ICRA.

Stressed assets:

• stressed assets are getting increased attention as the trend of deteriorating asset quality has emerged as a big economic risk for the Indian banking sector. Stressed assets is a powerful indicator of the health of the banking system. Stressed assets = NPAs + Restructured loans

Written off assets.

• Assets of the banking system comprises of loans given and investment (in bonds) made by banks. Quality of the asset indicates how much of the loans taken by the borrowers are repaid in the form of interests and principal. The most important scale of asset quality is Non-Performing Assets (NPA).

Non-Performing Assets (NPA):

• An NPA means interest or principal is not repaid by the borrower during a specified time period. In most cases, debt is classified as nonperforming when loan payments have not been made for a period of 90 days.
• While 90 days of Non-payment is the standard, the amount of elapsed time may be shorter or longer depending on the terms and conditions of each loan.

Restructured loan:

• Restructured asset or loan are that assets which got an extended repayment period, reduced interest rate, converting a part of the loan into equity, providing additional financing, or some combination of these measures.
• A restructured loan also indicates bad asset quality of banks. This is because a restructured loan was a past NPA or it has been modified into a new loan. Whether the borrower will repay it in future remains a risky element. Corporate Debt Restructuring Mechanism (CDM) allows restructuring of loans.

Corporate Debt Restructuring Mechanism (CDM):

• Corporate Debt Restructuring (“CDR”) mechanism is a voluntary non statutory mechanism under which financial institutions and banks come together to restructure the debt of companies facing financial difficulties due to internal or external factors, in order to provide timely support to such companies.

Write off assets:

• Written off assets are those the bank or lender doesn’t count the money borrower owes to it.

Insolvency and Bankruptcy Board of India (IBBI):

• The Insolvency and Bankruptcy Board of India (IBBI) is the regulator for overseeing insolvency proceedings and entities like Insolvency Professional Agencies (IPA), Insolvency Professionals (IP) and Information Utilities (IU) in It was established on 1 October 2016 and given statutory powers through the Insolvency and Bankruptcy Code, which was passed by Lok Sabha on 5 May 2016.
• It covers Individuals, Companies, Limited Liability Partnerships and Partnership The new code will speed up the resolution process for stressed assets in the country.