Bad Loans Be Gone: RBI Proposes Securitization Framework

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The Reserve Bank of India (RBI) has proposed a new stressed assets securitization framework to aid in the quicker resolution of bad loans. The framework would allow banks and financial institutions to transfer their stressed assets to an asset reconstruction company (ARC) or a security receipt (SR) issuer, which would then take on the responsibility of resolving the bad loan.

Under the proposed framework, banks and financial institutions would be allowed to transfer their stressed assets to ARCs or SR issuers through the sale of security receipts. These security receipts would be issued to the banks and financial institutions in exchange for their stressed assets, and would be backed by the underlying assets. The ARCs or SR issuers would then be responsible for resolving the bad loans, which could include recovering the outstanding amount or selling the underlying assets to recover their value.

The proposed framework would also include a number of safeguards to ensure that the resolution process is transparent and fair. For example, the ARCs or SR issuers would be required to follow a transparent and fair resolution process, and would be subject to regular audits and inspections. Additionally, the framework would require the ARCs or SR issuers to disclose all material information related to the stressed assets and the resolution process.

The proposed framework is aimed at addressing the issue of bad loans, which has long been a concern for the Indian banking sector. According to the RBI, bad loans in the country’s banking sector have reached an alarming level, with gross non-performing assets (GNPAs) of banks rising to 11.5% of total advances as of March 2020. The proposed framework is expected to provide a quicker and more efficient way to resolve these bad loans, which would help to stabilize the banking sector and support economic growth.

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