Understanding the prudential Framework of Government Debt Relief Schemes

Introduction: 

The RBI’s updated framework ensures that lenders can offer immediate support while upholding financial discipline and maintaining the overall credit ecosystem. In order to address borrower stress and provide financial relief, government has backed Debt Relief Schemes (DRS) that are significant for financial support. Reserve Bank of India (RBI) has issued board principals and guidelines relating to the participation in government Debt Relief Schemes including Sacrifice of interest or principal and loan account status. These guidelines come as a backdrop of lenders who are involved in implementation of various forms of DRS announced by the state government that aim to reduce the Debt burden on certain borrowers, often through waivers or reductions in exchange for their fiscal support. However, these would negatively affect credit discipline and in the long run may be counter- productive to credit flow to such borrowers. Apart from the broader implications for credit discipline they also have certain prudential concerns, which include delay in receipt of dues, mismatch between the claims that are admitted or submitted by the lenders. 

Overview of Prudential treatment in respect of government Debt Relief Schemes: 

The guidelines provided require compliance with principals and these guidelines do not override existing regulations for resolving stressed assets. These provide additional certain principals to participate in DRS based on their board-approved policies and regulatory norms. Including assessing the total outstanding debts, and accumulated interests. Ensuring the borrowers to be covered, are selected as per the terms and conditions of the scheme as well as the prudential aspects that also include cooling period for extending fresh credit, and impact on credit score. Which further to be communicated to the borrowers for availing benefits under the DRS proposed. Any waiver of unrealized interest of the principal under the DSR will be considered a compromise settlement. However, that will further be subjected to the “framework for compromise settlements and technical write-offs”. Further, if DRS funds fully cover dues, the debt is extinguished. If not, residual exposure is classified as per the original terms. There shall be no creation of any receivables against the government for DRS. And such will apply prudential norms and pursue recovery for non-performing accounts until funds are received.    

Overview of Model Operating Procedure Government Debt Relief Schemes:

A Model Operating Procedure (MOP) has been shared relating to government DRS with state governments. The DRS refers to schemes notified by the state government where fiscal authorities provide funding to cover debt obligations of specific borrowers requiring lenders to waive the debt. Before any notifications, the governments should consult with State level Banker’s committee (SLBC) or District Level Consultative Committee (DCC) to ensure effective design and implementations. The scheme targets affected borrowers, including clear eligibility criteria, timelines and compensation for delays. It further covered outstanding dues, including principal and interest without creating receivables against the government. These implementations of the scheme and settlement of claims by the government to banks should be completed within 45 to 60 days. However, if lending institutions agree to any time of design of DSR as per their Policies, it shall further be subjected to the applicable prudential guidelines. 

Conclusion: 

The guidelines emphasize prudent participation and ensure lenders adhere to regulatory norms while safeguarding credit integrity. By providing a rationalized implementation with a clear view on eligibility criteria and timelines, the framework promotes effective Debt Relief while preventing long term risks, ultimately providing balance to borrowers with financial stability, reinforcing responsible lending by protecting the economic environment.