Guidelines on Government Debt Relief Schemes (DRS)

Posted On - 24 January, 2025 • By - Prasanna Katkam

Introduction

The Reserve Bank of India (RBI) has issued guidelines for Regulated Entities (REs), such as banks and Non-Banking Financial Companies (NBFCs), on their participation in Debt Relief Schemes (DRS) introduced by State Governments. These schemes typically involve waivers of borrowers’ debt obligations, supported by fiscal measures. While aimed at addressing financial distress, frequent or poorly designed DRS can negatively impact credit discipline, create moral hazards, and pose operational challenges for lenders.

Necessity of the Notification

DRS, if implemented inconsistently or without proper planning, can delay repayments, lead to mismatches in claims and government settlements, and impose obligations on lenders to provide fresh credit. This can undermine financial discipline and hinder credit availability for targeted borrower segments. A structured framework is needed to ensure that such schemes address borrower distress without jeopardizing the financial stability of lending institutions or credit culture.

Significance of the Notification

The notification provides clear guidelines for REs to manage their participation in DRS while adhering to prudential norms. Additionally, a Model Operating Procedure (MOP) is shared with State Governments to ensure alignment among stakeholders, including borrowers, lenders, and fiscal authorities, during the design and implementation of DRS.

Key Guidelines for REs

1. Participation in DRS:

      • REs should evaluate participation based on Board-approved policies and regulatory norms.
      • Concerns about scheme provisions affecting borrower welfare or prudence should be raised during consultations with State-level or district-level committees.

      2. Selection of Borrowers:

      • Borrowers must be chosen strictly as per scheme terms to avoid rejections.
      • Borrowers must be informed of the scheme’s terms, including cooling-off periods for new credit and credit score impacts.

      3. Prudential Treatment of Sacrifices:

      • Waivers of interest or principal will be treated as compromise settlements per existing prudential norms.
      • Residual exposures will follow standard asset classification norms unless restructured.

      4. Loan Account Status:

      • Full settlement by the government extinguishes borrower debt.
      • Partial settlements leave residual exposures subject to the original loan’s terms.

      5. Government Dues:

      • REs must not create receivables against the government for DRS claims.
      • Recovery efforts should continue until funds are received.

      Model Operating Procedure for State Governments

      1. Purpose and Design:

      • DRS should address specific financial stress and serve as a last resort when other measures fail.
      • The scheme must have clear eligibility criteria, timelines, and provisions to compensate for delays in settlement.

      2. Funding and Implementation:

      • Budgetary provisions must fully cover settlements upfront.
      • Implementation should be time-bound, ideally within 45-60 days.

      3. Restrictions:

      • DRS should not compel REs to waive dues, provide fresh credit, or halt recovery actions unless agreed upon under Board-approved policies.

      Conclusion

      The RBI’s guidelines aim to balance borrower relief with the preservation of financial discipline and credit culture. By providing a transparent and structured framework, the notification ensures that DRS effectively addresses borrower distress without compromising the stability of the financial ecosystem. This approach safeguards sustainable credit flows and long-term financial health.