RBI Directions for Small Finance Banks - Resolution of Stressed Assets

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Short title and commencement B. Applicability C. Definitions Chapter II - General Requirements A. Board approved policies: B. Early identification and reporting of stress C. Disclosures D. Supervisory Review Chapter III - Resolution Process A. Review Period B. Inter-Creditor Agreement C. Resolution Plan Chapter IV - Additional Provisioning A. Delayed Implementation of Resolution Plan – Additional Provisioning Chapter V - Prudential Norms Applicable to Restructuring A. Applicability B. Asset Classification Post Restructuring C. Additional Finance D. Asset classification upgrade after satisfactory performance E. Default by a borrower after monitoring period F. Provisioning post Restructuring G. Income Recognition H. Change in Ownership Chapter VI - Special Cases of Restructuring A. Sale and Leaseback Transactions B. Refinancing of Exposures C. Borrowers who have committed Frauds / Malfeasance / Wilful Default D. Compromise Settlements and Technical Write-offs E. [***] F. Projects Under Implementation Chapter VI-A – Resolution of Accounts Impacted by Calamities A. Role of State Level Bankers’ Committee (SLBC) / Union Territory Level Bankers' Committee (UTLBC) / District Consultative Committee (DCC) B. Implementation of Resolution Plan by the banks C. Ancillary Measures D. Reporting Requirements Chapter VII - Government Debt Relief Schemes (DRS) A. Prudential treatment in respect of Government Debt Relief Schemes (DRS): Chapter VIII: Prudential Treatment of Instruments Acquired as part of Restructuring A. Asset classification of instruments acquired as part of restructuring B. Provisioning in respect of instruments acquired as part of restructuring C. Valuation of instruments acquired as part of restructuring D. Income Recognition from instruments acquired as part of restructuring Chapter IX - Regulatory Exemptions A. Exemptions from RBI Regulations B. Exemptions from Regulations of Securities and Exchange Board of India (SEBI) Chapter X - Special Measures A. Trade Relief Measures Chapter XI - Repeal and Other Provisions A. Repeal and saving B. Application of other laws not barred C. Interpretations Annex Introduction These Directions are issued with a view to providing a framework for early recognition, reporting and time bound resolution of stressed assets. As compromise settlements are a valid resolution plan, these Directions also rationalise and harmonise the instructions on compromise settlements and technical write-offs, in order to provide impetus to resolution of stressed assets in the system. Further, these Directions lay down the consolidated regulatory treatment upon change in the Date of Commencement of Commercial Operations of projects in infrastructure and non-infrastructure (including commercial real estate & commercial real estate- residential housing). Some of the banks may also be involved in implementation of various forms of Debt Relief Schemes (DRS) announced by State Governments that inter alia entail sacrifice / waiver of debt obligations of a targeted segment of borrowers, against fiscal support. If such schemes are announced frequently, incommensurately, or without due consideration to the principles of financial discipline, they would negatively affect credit discipline and in the long run, may be counter-productive to the credit flow to such borrowers. Apart from the broader implications for the credit discipline and moral hazard issues, DRS also raises certain prudential concerns, which include delay in receipt of dues; mismatch between the claims admitted / submitted by the banks and accepted by the concerned Government as per the terms of the scheme; mandatory requirement of fresh credit by the banks, etc. These Directions also lay down certain broad principles regarding participation of banks in DRS and specifies a model operating procedure, which has been shared with the State Governments for their consideration while designing and implementing such DRS to avoid any non-alignment of expectations of the stakeholders involved, including the Government, lenders, borrowers, etc. Accordingly, in exercise of the powers conferred by the Sections 21 and 35A of the Banking Regulation Act, 1949, the Reserve Bank, being satisfied that it is necessary and expedient in public interest so to do, hereby, issues these Directions hereinafter specified. These Directions are issued without prejudice to issuance of specific directions, from time to time, by the Reserve Bank to banks, in terms of the provisions of Section 35AA of the Banking Regulation Act, 1949, for initiation of insolvency proceedings against specific borrowers under the Insolvency and Bankruptcy Code, 2016 (IBC). Chapter I - Preliminary A. Short title and commencement 1. These Directions shall be called the Reserve Bank of India (Small Finance Banks – Resolution of Stressed Assets) Directions, 2025. 2. These Directions shall come into force with immediate effect unless specified otherwise. B. Applicability 3. These Directions shall be applicable to Small Finance Banks (hereinafter collectively referred to as ‘banks’ and individually as a ‘bank’). 4. The instructions contained in Chapter III and Chapter IV shall not be applicable to revival and rehabilitation of MSMEs covered by the instructions contained in Circular No. FIDD.MSME & NFS.BC.No.21/06.02.31/2015-16 dated March 17, 2016 , as amended from time to time. 5. These Directions shall not be applicable for borrower entities in respect of which specific directions have already been issued or are issued by the Reserve Bank to the banks for initiation of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016. A bank shall pursue such cases as per the specific instructions issued to them. C. Definitions 6. In these Directions, the following definitions shall apply, unless the context otherwise requires: (1) ‘aggregate exposure’ shall include all fund based and non-fund based exposure, including investment exposure; (2) ‘compromise settlement’ shall refer to any negotiated arrangement with the borrower to fully settle the claims of a bank against the borrower in cash. Explanation: Compromise settlement may entail some sacrifice of the amount due from the borrower on the part of the bank with corresponding waiver of claims of the bank against the borrower to that extent. (3) ‘credit event’ in the context of projects under implementation shall be deemed to have been triggered on the occurrence of any of the following: default with any lender; one or more lenders determine a need for extension of the original / extended Date of Commencement of Commercial Operations (DCCO), as the case may be, of a project; expiry of original / extended DCCO, as the case may be; one or more lenders determine a need for infusion of additional debt; the project is faced with financial difficulty determined as per paragraphs 9 to 11; 1 (3A) ‘date of invocation’ for the purpose of Chapter VI-A of these Directions shall mean the date on which the borrower and the bank agree to proceed with a resolution plan through a documented arrangement, other than in case of deemed invocation as specified in paragraph 124N of these Directions. (4) ‘default’ shall mean non-payment of debt (as defined under the Insolvency and Bankruptcy Code, 2016) when whole or any part or instalment of the debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be. Provided that for revolving facilities like cash credit, default would also mean, without prejudice to the above, the outstanding balance remaining continuously in excess of the sanctioned limit or drawing power, whichever is lower, for more than thirty days. (5) ‘interest during construction’ shall mean the interest accrued on debt provided by a bank and capitalised during the construction phase of the project; (6) ‘lender’, in the context of project finance, shall mean any of the following entities: a Commercial Bank (including Small Finance Banks (SFBs) but excluding Payments Banks (PBs), Local Area Banks (LABs) and Regional Rural Banks (RRBs)); a Non-Banking Financial Company (NBFC), (including a Housing Finance Company (HFC)); a Primary (Urban) Cooperative Bank (UCB); an All India Financial Institution (AIFI). (7) ‘liquidation value’ shall mean the estimated realisable value of the assets of the relevant borrower, if such borrower were to be liquidated as on the date of commencement of the Review Period; (8) ‘monitoring period’ shall mean the period from the date of implementation of resolution plan up to the date by which at least 10 per cent of the sum of outstanding principal debt as per the resolution plan and interest capitalisation sanctioned as part of the restructuring, if any, is repaid; 2 (8A) ‘natural calamity’ shall mean an event recognized under the National Disaster Response Fund (NDRF) / State Disaster Response Fund (SDRF). (9) ‘outstanding principal debt’ shall include all credit facilities, including debt / debt like instruments (viz., non-convertible debentures, optionally convertible debentures, optionally convertible preference shares, non-convertible preference shares etc.) that exist post implementation of the resolution plan. Explanation: Only equity and instruments compulsorily convertible into equity (without any embedded optionality) shall be exempt from determining outstanding principal debt. (10) ‘residual debt’ shall mean the aggregate outstanding principal debt envisaged to be held by all the specified lenders as per the proposed resolution plan; (11) ‘resolution plan’ in the context of projects under implementation shall mean a mutually agreed, legally binding, feasible and time-bound plan for resolution of stress in a project finance account. The resolution plan may involve any action / plan / reorganization including, but not limited to, regularisation of the account by payment of all overdues by the debtor entity, sale of the exposures to other entities / investors, change in ownership, extension of DCCO and restructuring. (12) ‘restructuring’ shall mean an act in which a bank, for economic or legal reasons relating to the borrower’s financial difficulty, grants concessions to the borrower. Explanation: Restructuring would normally involve modification of terms of the advances / securities, which would generally include, among others, alteration of payment period / payable amount / the amount of instalments / rate of interest; roll over of credit facilities; sanction of additional credit facility/ release of additional funds for an account in default to aid curing of default / enhancement of existing credit limits; compromise settlements where time for payment of settlement amount exceeds three months. (13) ‘review period’ shall mean a period of thirty days from the date of default or a credit event, as the case may be; (14) ‘satisfactory performance’ shall mean that the borrower entity is not in default with any specified lender at any point of time during the period concerned; Provided that in the case of restructuring of Micro, Small, and Medium Enterprises (MSME) accounts where aggregate exposure of Commercial Banks (including SFBs, but excluding PBs, LABs and RRBs) is less than ₹25 crore, satisfactory performance shall mean: no payment (interest and / or principal) remain outstanding for a period of more than 30 days; in the case of cash credit / overdraft account, the outstanding in the account is not more than the sanctioned limit or drawing power, whichever is lower, for a period of more than 30 continuous days. (15) ‘specified lender’ shall mean any of the following entities: a Commercial Bank (including SFBs but excluding PBs, LABs and RRBs); an All India Financial Institution. a deposit taking NBFC (excluding a HFC); a non-deposit taking NBFC (excluding a HFC) having asset size of ₹500 crore and above. (16) ‘specified period’ shall mean the period from the date of implementation of resolution plan up to the date by which at least 20 per cent of the sum of outstanding principal debt as per the resolution plan and interest capitalisation sanctioned as part of the restructuring, if any, is repaid. Provided that for accounts restructured under IBC, the specified period shall be deemed to commence from the date of implementation of the resolution plan as approved by the Adjudicating Authority. Provided further that in the case of restructuring of MSME accounts where aggregate exposure of banks (including SFBs, but excluding PBs, LABs and RRBs) is less than ₹25 crore, specified period shall mean a period of one year from the commencement of the first payment of interest or principal, whichever is later, on the credit facility with longest period of moratorium under the terms of restructuring package for a particular bank. (17) ‘standby credit facility’ shall mean a contingent credit line sanctioned for the project at the time of financial closure to fund any cost overrun during the construction phase of the project. (18) ‘technical write-off’ shall refer to cases where the non- performing assets remain outstanding at borrowers’ loan account level, but are written-off (fully or partially) by a bank only for accounting purposes, without involving any waiver of claims against the borrower, and without prejudice to the recovery of the same. 7. The terms ‘Appointed Date, Commercial Real Estate (CRE)’, ‘Commercial Real Estate – Housing (CRE-RH)’, ‘Construction phase’, ‘Date of Financial Closure’, ‘Infrastructure Sector’, ‘Original Date of Commencement of Commercial Operations (Original DCCO)’, ‘Extended DCCO’, ‘Actual DCCO’, ‘Project’, and ‘Project Finance’ shall have the same meaning assigned to them in the Reserve Bank of India (Small Finance Banks – Credit Facilities) Directions, 2025 . 8. All other expressions, unless defined herein, shall have the same meaning as have been assigned to them under the Banking Regulation Act, 1949 or the Reserve Bank of India Act, 1934 or the Companies Act, 2013, or any statutory modification or re-enactment thereto or other regulations issued by the Reserve Bank or the Glossary of Terms published by the Reserve Bank or as used in commercial parlance, as the case may be. Chapter II - General Requirements A. Board approved policies: 9. A bank shall put in place Board-approved policies for resolution of stressed assets, including the timelines for resolution as well as detailed policies on various signs of financial difficulty, providing quantitative as well as qualitative parameters, for determining financial difficulty. 10. A non-exhaustive indicative list of signs of financial difficulty, which is based on the Basel Committee Guidelines on ‘Prudential treatment of problem assets – definitions of non-performing exposures and forbearance’, is provided as under for reference: (1) A default, as per the definition provided in the framework, shall be treated as an indicator for financial difficulty, irrespective of reasons for the default. (2) A borrower not in default, but it is probable that the borrower will default on any of its exposures in the foreseeable future without the concession, for instance, when there has been a pattern of delinquency in payments on its exposures. (3) A borrower’s outstanding securities have been delisted, or are in the process of being delisted, or are under threat of being delisted from an exchange due to noncompliance with the listing requirements or for financial reasons. (4) On the basis of actual performance, estimates and projections that encompass the borrower’s current level of operations, the borrower’s cash flows are assessed to be insufficient to service all of its loans or debt securities (both interest and principal) in accordance with the contractual terms of the existing agreement for the foreseeable future. (5) A borrower’s credit facilities are in non-performing status or would be categorised as nonperforming without the concessions. (6) A borrower’s existing exposures are categorised as exposures that have already evidenced difficulty in the borrower’s ability to repay in accordance with the bank’s internal credit rating system. 11. A bank shall complement the above list of non-exhaustive enumeration of financial difficulty indicators with key financial ratios and operational parameters which may include quantitative and qualitative aspects. Explanation: Financial difficulty may be identified even in the absence of arrears on an exposure. 12. A bank shall put in place Board-approved policies for undertaking compromise settlements with the borrowers as well as for technical write-offs, which shall inter alia include the following: (1) comprehensive prescription of the process to be followed for all compromise settlements and technical write-offs, with specific guidance on the necessary conditions precedent such as minimum ageing, deterioration in collateral value etc.; (2) graded framework for examination of staff accountability in such cases with reasonable thresholds and timelines as may be decided by the Board; (3) provisions relating to permissible sacrifice for various categories of exposures while arriving at the settlement amount, after prudently reckoning the current realisable value of security/collateral, where available; (4) methodology for arriving at the realisable value of the security in respect of compromise settlements. (5) delegation of powers for approval / sanction of compromise settlements and technical write-offs, subject to the following: (i) delegation of power for such approvals rests with an authority (individual or committee, as the case may be) which is at least one level higher in hierarchy than the authority vested with power to sanction the credit / investment exposure. Provided that any official who was part of sanctioning the loan (as individual or part of a committee) shall not be part of the approving the proposal for compromise settlement of the same loan account, in any capacity. (ii) proposals for compromise settlements in respect of borrowers classified as fraud or wilful defaulter, as permitted in terms of paragraphs 87 to 102, shall require approval of the Board in all cases. 13. A bank shall put in place Board approved policy for permitting payment in instalments of the crystallized Mark to Market (MTM) value of partially or fully terminated derivative contracts in terms of paragraphs 45 and 46. 3 [13A. The board approved policy of the bank shall incorporate provisions for resolution as provided for under Chapter VI-A of these Directions, including the following: the objective principles for the terms of relief to be granted to various borrower / loan categories.  the potential relief measures and the verifiable parameters for making such determination. the delegation matrix for deciding and implementing relief measures (if any), including for restructuring, sanction of additional finance etc., with focus on the timely implementation of relief measures.] 14. The robustness of the board approved policy and the outcomes would be examined as part of the supervisory oversight of the Reserve Bank. B. Early identification and reporting of stress 15. A bank shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA) as per the following categories: Loans other than revolving facilities Loans in the nature of revolving facilities like cash credit/overdraft SMA Sub-categories Basis for classification – Principal or interest payment or any other amount wholly or partly overdue SMA Sub-categories Basis for classification – Outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for a period of SMA-0 Up to 30 days     SMA-1 More than 30 days and up to 60 days SMA-1 More than 30 days and up to 60 days SMA-2 More than 60 days and up to 90 days SMA-2 More than 60 days and up to 90 days 16. The instructions on classification of borrower accounts into SMA categories are applicable for all loans (including retail loans), other than agricultural advances governed by crop season-based asset classification norms, irrespective of size of exposure of the bank. 17. A bank shall report credit information, including classification of an account as SMA, to Central Repository of Information on Large Credits (CRILC), on all borrowers having aggregate exposure of ₹5 crore and above with them, on a monthly basis. 18. A bank shall submit a weekly report of instances of default by all borrowers (with aggregate exposure of ₹5 crore and above) by close of business on every Friday, or the preceding working day if Friday happens to be a holiday. 19. A bank shall adhere to the relevant provisions on submission of financial information to information utilities of Insolvency and Bankruptcy Code, 2016 and Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 and put in place appropriate systems and procedures to ensure compliance to the provisions of the Code and Regulations. C. Disclosures 20. A bank shall make suitable disclosures in its financial statements in the ‘Notes to Accounts’, as specified in the Reserve Bank of India (Small Finance Banks – Financial Statements: Presentation and Disclosures) Directions, 2025 . D. Supervisory Review 21. Any action by a bank with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory / enforcement actions as deemed appropriate by the Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary penalties. 22. The action under paragraph 21 above may be in addition to direction to bank/s to file insolvency application under the Insolvency and Bankruptcy Code, 2016. Chapter III - Resolution Process A. Review Period 23. Once a borrower is reported to be in default by any of the specified lenders other than a NBFC, the specified lenders shall jointly undertake a prima facie review of the borrower account within the Review Period. 24. During this Review Period, the specified lenders shall jointly decide on the resolution strategy, including the nature of the resolution plan, the approach for implementation of the resolution plan, etc. 25. A bank may also choose to initiate legal proceedings for insolvency or recovery. 26. Since default with any lender is a lagging indicator of financial stress faced by the borrower, it is expected that a bank initiates the process of implementing a resolution plan even before a default. B. Inter-Creditor Agreement 27. In cases where resolution plan is to be implemented, all specified lenders, shall enter into an inter-creditor agreement, during the Review Period, to provide for ground rules for finalisation and implementation of the resolution plan in respect of borrowers with credit facilities from more than one specified lender. 28. The inter-creditor agreement shall provide that: any decision agreed by signatories representing 75 per cent by value of total outstanding credit facilities (fund based as well non-fund based) and 60 per cent of signatories by number shall be binding upon all the signatories; and resolution plans shall provide for payment not less than the liquidation value due to the dissenting signatories. 29. In addition to the requirements in paragraph 28 above, the inter-creditor agreement shall, inter alia, provide for rights and duties of majority signatories, duties and protection of rights of dissenting signatories, treatment of signatories with priority in cash flows / differential security interest, etc. C. Resolution Plan 30. A resolution plan may involve any action / plan / reorganization including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, sale of the exposures to other entities / investors, change in ownership and restructuring. 31. The resolution plan shall be clearly documented by the bank (even if there is no change in any terms and conditions). 32. A resolution plan involving restructuring / change in ownership in respect of accounts where the aggregate exposure of specified lenders is ₹100 crore and above, shall require independent credit evaluation of the residual debt by credit rating agencies specifically authorised by the Reserve Bank for this purpose. 33. The list of RP symbols that can be provided by credit rating agencies as independent credit evaluation and their meanings are as follows: ICE Symbols Definition RP1 Debt facilities/instruments with this symbol are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such debt facilities/instruments carry lowest credit risk. RP2 Debt facilities/instruments with this symbol are considered to have high degree of safety regarding timely servicing of financial obligations. Such debt facilities/instruments carry very low credit risk. RP3 Debt facilities/instruments with this symbol are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such debt facilities/instruments carry low credit risk. RP4 Debt facilities/instruments with this symbol are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such debt facilities/instruments carry moderate credit risk. RP5 Debt facilities/instruments with this symbol are considered to have moderate risk of default regarding timely servicing of financial obligations. RP6 Debt facilities/instruments with this symbol are considered to have high risk of default regarding timely servicing of financial obligations. RP7 Debt facilities/instruments with this symbol are considered to have very high risk of default regarding timely servicing of financial obligations. 34. While accounts with aggregate exposure of ₹500 crore and above shall require two such independent credit evaluations, others shall require one independent credit evaluation. 35. Only such resolution plans which receive a credit opinion of RP4 or better for the residual debt from one or two credit rating agencies, as the case may be, shall be considered for implementation. 36. If independent credit evaluation is obtained from more than the required number of credit rating agencies, all such independent credit evaluation opinions shall be RP4 or better for the resolution plan to be considered for implementation. 37. The credit rating agencies shall be directly engaged by the specified lenders for the purpose of independent credit evaluation and the payment of fee for such assignments shall be made by the specified lenders. 38. During the period when the RP is being finalised and implemented, the usual asset classification norms would continue to apply subject to additional provisioning requirements of Chapter IV of this Direction. The process of re-classification of an asset should not stop merely because RP is under consideration. 39. A resolution plan in respect of borrowers to whom one or more specified lenders continue to have credit exposure, shall be deemed to be ‘implemented’ only if the following conditions are met: (1) A resolution plan which does not involve restructuring / change in ownership shall be deemed to be implemented only if the borrower is not in default with any of the specified lenders as on 180th day from the end of the Review Period. Any subsequent default after the 180-day period shall be treated as a fresh default, triggering a fresh review. (2) A resolution plan which involves restructuring / change in ownership shall be deemed to be implemented only if all of the following conditions are met: all related documentation, including execution of necessary agreements between specified lenders and borrower / creation of security charge / perfection of securities, are completed by the specified lenders concerned in consonance with the resolution plan being implemented; the new capital structure and / or changes in the terms of conditions of the existing loans get duly reflected in the books of all the specified lenders and the borrower; and, borrower is not in default with any of the specified lenders. 40. A resolution plan which involves specified lenders exiting the exposure by assigning the exposures to third party or a resolution plan involving recovery action shall be deemed to be implemented only if the exposure to the borrower is fully extinguished. 41. In respect of accounts with aggregate exposure above a specified threshold with the specified lenders on or after the ‘reference date’, resolution plan shall be implemented within 180 days from the end of Review Period, which shall commence not later than: the reference date, if in default as on the reference date; or the date of first default after the reference date. 42. The reference dates for the purpose of paragraph 41 above shall be as under: Aggregate exposure of a borrower to specified lenders other than NBFC Reference date ₹2000 crore and above June 07, 2019 ₹1500 crore and above, but less than ₹2000 crore January 1, 2020 Less than ₹1500 crore To be announced in due course 43. In respect of accounts having aggregate exposure below ₹1,500 crore, the requirements as laid down under Chapter IV of these Directions shall not apply. 44. Where a derivative contract is restructured, the following instructions shall apply: (1) Any change in any of the parameters of the original contract would be treated as a restructuring. (2) The change in mark-to-market (MTM) value of the contract on the date of restructuring should be cash settled. (3) The restructuring of the derivative contract shall be carried out at prevalent market rates, and not on the basis of off-market rates. 45. If a bank partially or fully terminates a derivative contract before maturity, at their discretion, based on preference of the clients to reduce the notional exposure of the hedging derivative contract, such reduction in notional exposure shall not be treated as restructuring of the derivative contract provided all other parameters of the original contract remain unchanged. 46. In such cases, if the MTM value of the derivative contract is not cash settled, a bank may permit payment in instalments of the crystallized MTM of such derivative contracts (including Forex Forward Contracts), subject to the following conditions: (1) A bank shall permit repayment in instalments only if there is a reasonable certainty of repayment by the client. (2) The repayment period shall not extend beyond the maturity date of the contract. (3) The repayment instalments for the crystallized MTM shall be uniformly received over the remaining maturity of the contract and its periodicity shall be at least once in a quarter. Chapter IV - Additional Provisioning A. Delayed Implementation of Resolution Plan – Additional Provisioning 47. Where a viable resolution plan in respect of a borrower specified in paragraphs 39 and 40 is not implemented within the timelines given below, a bank having exposure to the borrower shall make additional specific provisions as under: Timeline for implementation of viable RP Additional specific provisions to be made as a per cent of total outstanding(fund based as well non-fund based), if RP not implemented within the timeline 180 days from the end of Review Period 20 per cent 365 days from the commencement of Review Period 15 per cent (i.e. total additional provisioning of 35 per cent) 48. The additional specific provisions shall be made over and above the higher of the following, subject to the total provisions held being capped at 100 per cent of total outstanding: (1) the provisions already held; or, (2) the provisions required to be made as per the asset classification status of the borrower account. 49. The additional specific provisions shall also be required to be made in cases where recovery proceedings have been initiated in respect of the borrower, unless the recovery proceedings are fully completed. 50. The additional specific provisions specified in paragraph 47 may be reversed as under: (1) where the resolution plan involves only payment of overdues by the borrower – the additional provisions may be reversed only if the borrower is not in default for a period of six months from the date of clearing of the overdues with all the specified lenders; (2) where resolution plan involves restructuring / change in ownership outside the Insolvency and Bankruptcy Code, 2016 – the additional provisions may be reversed upon implementation of the resolution plan; (3) where resolution is pursued under the Insolvency and Bankruptcy Code, 2016 – half of the additional provisions made may be reversed on filing of insolvency application and the remaining additional provisions may be reversed upon admission of the borrower into the insolvency resolution process under the Insolvency and Bankruptcy Code, 2016; or, (4) where assignment of debt / recovery proceedings is initiated – the additional provisions may be reversed upon completion of the assignment of debt / recovery. Chapter V - Prudential Norms Applicable to Restructuring A. Applicability 51. The provisions of this Chapter shall be applicable to all restructurings, including those undertaken under the Insolvency and Bankruptcy Code, 2016. B. Asset Classification Post Restructuring 52. An account classified as 'standard' shall be immediately downgraded as non-performing assets, i.e., ‘sub-standard’ to begin with, following a restructuring by a bank. 53. An account classified as non-performing asset, upon restructuring by a bank, shall continue to have the same asset classification as prior to restructuring. 54. In both above cases, the asset classification shall continue to be governed by the ageing criteria as per extant asset classification norms contained in the Reserve Bank of India (Small Finance Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025 . C. Additional Finance 55. Any additional finance approved under the resolution plan (including any resolution plan approved by the Adjudicating Authority under Insolvency and Bankruptcy Code, 2016) may be treated by a bank as standard asset during the monitoring period under the approved resolution plan, provided the account demonstrates satisfactory performance during the monitoring period. 56. If the restructured asset fails to perform satisfactorily during the monitoring period or does not qualify for upgradation at the end of the monitoring period, the additional finance shall be placed in the same asset classification category as the restructured debt by a bank. 57. Any interim finance [as defined in section 5 (15) of the Insolvency and Bankruptcy Code, 2016] extended by the specified lenders to borrowers undergoing insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 may be treated as standard asset during the insolvency resolution process period as defined in the Insolvency and Bankruptcy Code, 2016. D. Asset classification upgrade after satisfactory performance 58. Standard accounts classified as non-performing and non-performing accounts retained in the same category on restructuring by a bank may be upgraded only when all the outstanding loan / credit facilities in the account demonstrate ‘satisfactory performance’ with respect to all the specified lenders during the monitoring period. Provided that the account cannot be upgraded before one year from the commencement of the first payment of interest or principal (whichever is later) on the credit facility with longest period of moratorium under the terms of RP. 59. Notwithstanding the requirement in paragraph 58, a MSME account where aggregate exposure of the commercial banks (including SFBs, but excluding PBs, LABs and RRBs) is less than ₹25 crores may be considered for upgradation to ‘standard’ only if it demonstrates satisfactory performance during the specified period for that particular bank. 60. In addition to the requirement in paragraph 58, for accounts where the aggregate exposure of specified lenders is ₹100 crore and above at the time of implementation of resolution plan, to qualify for an upgrade, in addition to demonstration of satisfactory performance, the credit facilities of the borrower shall also be rated as investment grade (BBB- or better), at the time of upgrade, by credit rating agencies accredited by the Reserve Bank for the purpose of bank loan ratings. Provided that while accounts with aggregate exposure of ₹500 crore and above shall require two ratings, those below ₹500 crore shall require one rating. Provided further that if the ratings are obtained from more than the required number of credit rating agencies, all such ratings shall be investment grade for the account to qualify for an upgrade. Explanation: These ratings referred to in the second proviso shall be the normal ratings provided by the credit rating agencies and not Independent Credit Evaluation specified in paragraph 32. 61. If a borrower other than a MSME where aggregate exposure of the commercial banks (including SFBs, but excluding PBs, LABs and RRBs) is less than ₹25 crores fails to demonstrate satisfactory performance with respect to all the specified lenders during the monitoring period, asset classification upgrade shall be subject to implementation of a fresh restructuring / change in ownership under these Directions or under the Insolvency and Bankruptcy Code, 2016. E. Default by a borrower after monitoring period 62. Any default by a borrower in any of the credit facilities with any of the specified lenders subsequent to upgrade in asset classification before the end of the specified period, will require a fresh resolution plan to be implemented within the specified timelines as any default would entail. F. Provisioning post Restructuring 63. An account that has been restructured shall attract provisioning as per the asset classification category as laid out in the Reserve Bank of India (Small Finance Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025 . 64. A bank shall make additional specific provision of 15 per cent for an account referred to in paragraphs 61 and 62 at the end of the Review Period. 65. Specific provisions held on restructured assets by a bank as per paragraph 64 above, may be reversed when the accounts are upgraded to standard category. 66. Additional specific provisions as required under paragraph 64, along with other additional provisions, may be reversed as per the norms laid down in paragraph 50 by a bank. 67. During the insolvency resolution process period, provisioning for the interim finance shall be governed by Reserve Bank of India (Small Finance Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025 . 68. Subsequently, upon approval of the resolution plan by the Adjudicating Authority, treatment of such interim finance shall be as per the norms applicable to additional finance, as per paragraphs 55 and 56 69. In respect of accounts of borrowers where a final resolution plan, as approved by the Committee of Creditors, has been submitted by the Resolution Professional for approval of the Adjudicating Authority (in terms of section 30(6) of the Insolvency and Bankruptcy Code, 2016), a bank may keep the provisions held as on the date of such submission of RP frozen for a period of six months from the date of submission of the plan or up to ninety days from the date of approval of the resolution plan by the Adjudicating Authority in terms of section 31 (1) of the Insolvency and Bankruptcy Code, 2016, whichever is earlier. Provided that in cases where the provisioning held is lower than the expected required provisioning, a bank shall make additional provisioning to the extent of the shortfall. 70. The facility of freezing the quantum of the provision as per paragraph 70 shall be available only in cases where the provisioning held by a bank as on the date of submission of the plan for approval of the Adjudicating Authority is more than the expected provisioning required to be held in the normal course upon implementation of the approved resolution plan, taking into account the contours of the resolution plan approved by Committee of Creditors / Adjudicating Authority, as the case may be, and extant prudential norms. 71. Notwithstanding paragraph 70, a bank shall not reverse the excess provisions held as on the date of submission of the resolution plan for approval of the Adjudicating Authority at this stage. 72. Subsequent to the lapse of the period specified in paragraph 70, provisioning shall be as per the requirements in the Reserve Bank of India (Small Finance Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025 . 73. The facility of freezing of provisions as allowed in paragraph 70 shall lapse immediately if the Adjudicating Authority rejects the resolution plan thus submitted, and asset classification in respect of such borrower shall continue be governed by the extant asset classification norms. G. Income Recognition 74. Interest income in respect of restructured accounts classified as 'standard assets' may be recognized on accrual basis and that in respect of the restructured accounts classified as 'non-performing assets' shall be recognised on cash basis. 75. In the case of additional finance in accounts where the pre-restructuring facilities were classified as non-performing assets, the interest income shall be recognised only on cash basis by a bank except when the restructuring is accompanied by a change in ownership. H. Change in Ownership 76. In case of change in ownership of the borrowing entities, credit facilities of the concerned borrowing entities may be continued / upgraded as ‘standard’ by a bank after the change in ownership is implemented, either under the Insolvency and Bankruptcy Code, 2016 or under these Directions. 77. If the change in ownership is implemented under these Directions, then the classification as ‘standard’ shall be subject to the following conditions: (1) The bank shall conduct necessary due diligence in this regard and clearly establish that the acquirer is not a person disqualified in terms of Section 29A of the Insolvency and Bankruptcy Code, 2016. (2) The bank shall clearly establish that the ‘new promoter’ is not a person / entity / subsidiary / associate etc. (domestic as well as overseas), from the existing promoter/promoter group as defined in Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018. (3) The new promoter shall have acquired at least 26 per cent of the paid-up equity capital as well as voting rights of the borrower entity and shall be the single largest shareholder of the borrower entity. (4) The new promoter shall be in ‘control’ of the borrower entity as per the definition of ‘control’ in the Companies Act, 2013 / regulations issued by the Securities and Exchange Board of India / any other applicable regulations / accounting standards, as the case may be. (5) The conditions for implementation of resolution plan as per paragraph 39 are complied with. 78. Upon change in ownership, all the outstanding loans / credit facilities of the borrowing entity need to demonstrate satisfactory performance with respect to all the specified lenders during the monitoring period. 79. If the account fails to perform satisfactorily at any point of time during the monitoring period, it shall trigger a fresh Review Period. 80. The quantum of provisions held (excluding additional provisions) by the bank against the said account as on the date of change in ownership of the borrowing entities may be reversed only after the end of monitoring period subject to satisfactory performance during the same. 81. In case the promoters' shares have been pledged with a bank as collateral during the lock-in period mandated under ecurities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (ICDR) Regulations, 2018, and the pledge is invoked during the lock-in period by the bank consequent to default by the company, such shares may be transferred to the bank but shall continue to be under lock-in in the hands of the bank for the remaining lock-in period. Chapter VI - Special Cases of Restructuring A. Sale and Leaseback Transactions 82. A sale and leaseback transaction of the assets of a borrower or other transactions of similar nature shall be treated as an event of restructuring for the purpose of asset classification and provisioning in the books of a bank with regard to the residual debt of the seller as well as the debt of the buyer if all the following conditions are met: the seller of the assets is in financial difficulty; significant portion, i.e. more than 50 per cent, of the revenues of the buyer from the specific asset is dependent upon the cash flows from the seller; and 25 per cent or more of the loans availed by the buyer for the purchase of the specific asset is funded by the lenders who already have a credit exposure to the seller. B. Refinancing of Exposures 83. If borrowings / export advances (denominated in any currency, wherever permitted) are obtained for the purpose of repayment / refinancing of loans denominated in same / another currency: from a lender who is part of Indian banking system (where permitted); or with the support (where permitted) from the Indian banking system in the form of Guarantees / Standby Letters of Credit / Letters of Comfort, etc., such events shall be treated as ‘restructuring’ by a bank if the borrower concerned is under financial difficulty. C. Borrowers who have committed Frauds / Malfeasance / Wilful Default 84. Borrowers who have committed frauds/ malfeasance/ wilful default as well as any entity with which a wilful defaulter is associated shall remain ineligible for restructuring. 85. However, in cases where the existing promoters are replaced by new promoters satisfying the conditions specified at sub-paragraphs (1) to (4) of paragraph 77, and the borrower company is totally delinked from such erstwhile promoters / management, a bank may take a view on restructuring such accounts based on their viability, without prejudice to the continuance of criminal action against the erstwhile promoters / management. 86. A wilful defaulter or any entity with which a wilful defaulter is associated shall be eligible for restructuring subsequent to removal of the name of wilful defaulter from the List of Wilful Defaulters, subject to penal measures applicable to borrowers classified as wilful defaulter in terms of the Reserve Bank of India (Small Finance Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025 . D. Compromise Settlements and Technical Write-offs 87. The objective of compromise settlements shall be to maximise the possible recovery from a distressed borrower at minimum expense, in the best interest of the bank. 88. Compromise settlement is not available to borrowers as a matter of right; rather it is a discretion to be exercised by a bank based on its commercial judgement. 89. The compromise settlements and technical write-offs shall be without prejudice to any mutually agreed contractual provisions between a bank and a borrower relating to future contingent realizations or recovery by the bank, subject to such claims not being recognised in any manner on the balance sheet of the bank at the time of the settlement or subsequently till actual realization of such receivables. Provided that any such claims recognised on the balance sheet of the bank shall render the arrangement to be treated as restructuring. 90. Notwithstanding paragraph 89, compromise settlements where the time for payment of the agreed settlement amount exceeds three months shall be treated as restructuring. 91. Any arrangement involving part settlement with the borrower shall also fall under the definition of restructuring, and shall be governed by the provisions applicable thereto. 92. Technical write-off is an accounting procedure undertaken by a bank to cleanse the balance sheets of bad debts which are either considered unrecoverable or whose recovery is likely to consume disproportionate resources of the lenders. However, such technical write-offs do not entail any waiver of claims against the borrower and thus the bank’s right to recovery shall not be undermined in any manner. The legal obligation of the borrowers as well as the costs of such defaults for them remain unchanged vis-à-vis the position prior to technical write-offs. 93. In case of partial technical write-offs, the prudential requirements in respect of residual exposure, including provisioning and asset classification, shall be with reference to the original exposure. Provided that the amount of provision including the amount representing partial technical write-off shall meet the extant provisioning requirements, as computed on the gross value of the asset. 94. There shall be a reporting mechanism to the next higher authority, at least on a quarterly basis, with respect to compromise settlements and technical write offs approved by a particular authority. Provided that compromise settlements and technical write-offs approved by the MD & CEO / Board Level Committee shall be reported to the Board. 95. The Board shall mandate a suitable reporting format so as to ensure adequate coverage of the following aspects at the minimum: trend in number of accounts and amounts subjected to compromise settlement and/or technical write-off (q-o-q and y-o-y); out of (1) above, separate breakup of accounts classified as fraud, red-Flagged, wilful default and quick mortality accounts; amount-wise, sanctioning authority-wise, and business segment / asset-class wise grouping of such accounts; extent of recovery in technically written-off accounts. 96. In respect of borrowers subject to compromise settlements, there shall be a cooling period as determined by the respective Board approved policies before the bank can assume fresh exposures to such borrowers. Provided that the cooling period in respect of exposures other than farm credit exposures shall be subject to a floor of 12 months with a bank being free to stipulate higher cooling periods in terms of their Board approved policies. Provided further that the cooling period for farm credit exposures shall be determined by a bank as per their respective Board approved policies. Explanation: Farm credit for the above purpose shall refer to credit extended to agricultural activities as listed in the Reserve Bank of India (Small Finance Banks – Income Recognition, Asset Classification and Provisioning) Directions, 2025 . 97. The cooling period to be adopted in respect of exposures subjected to technical write-offs shall be as per the Board approved policies of a bank. 98. A bank may undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such borrowers. 99. The penal measures applicable to borrowers classified as fraud or wilful defaulter in terms of the Reserve Bank of India (Fraud Risk Management in Commercial Banks (including Regional Rural Banks) and All India Financial Institutions) Directions, 2024 and the Reserve Bank of India (Small Finance Banks – Treatment of Wilful Defaulters and Large Defaulters) Directions, 2025 , respectively, shall continue to be applicable in cases where a bank enter into compromise settlement with such borrowers, and the cooling periods specified in paragraphs 96 and 97, in respect of such borrowers, shall be without prejudice to such penal measures. FAQ 1: From a public policy perspective, what is the rationale for permitting a bank to enter into compromise settlement with borrowers classified as fraud or wilful defaulter? The primary regulatory objective is to enable multiple avenues to a bank to recover the money in default without much delay. Apart from the time value loss, inordinate delays result in asset value deterioration which hampers ultimate recoveries. Compromise settlement is recognized as a valid resolution mechanism under these Directions. The imperatives for a bank are no different when it comes to recovery from borrowers classified as fraud or wilful defaulter. Continuing such exposures on the balance sheets of a bank without resolution due to legal proceedings would lock the bank’s funds in an unproductive asset, which would not be a desirable position. As long as larger policy concerns are suitably addressed and the costs of malafide actions are made to be borne by the perpetrators, early recoveries by a bank should be a preferred option, subject to safeguards. Further, continuation of criminal proceedings underway or to be initiated against the borrowers classified as fraud or wilful defaulter, would ensure that perpetrators of any malafide action do not go scot-free. FAQ 2: A bank is not permitted to restructure borrower accounts classified as fraud or wilful defaulter, except in case of change in ownership. Why a different treatment is prescribed for compromise settlements for such borrowers? Restructuring in general entails a bank having a continuing exposure to the borrower entity even after restructuring and hence, in case of borrowers classified as fraud or wilful defaulter, permitting the bank to continue its credit relationship with the borrower entity would be fraught with moral hazard. On the other hand, a compromise settlement entails a complete detachment of the bank with the borrower. Therefore, permitting a bank to settle with the borrowers as per their commercial judgement would enhance recovery prospects. 100. The compromise settlements with the borrowers under these Directions shall be without prejudice to the provisions of any other statute in force. 101. Wherever a bank had commenced recovery proceedings under a judicial forum and the same is pending before such judicial forum, any settlement arrived at with the borrower shall be subject to obtaining a consent decree from the concerned judicial authorities. 102. In addition to the requirements contained in paragraphs 87 to 101, the following shall apply in cases of compromise settlements undertaken by a bank through Lok Adalats: (1) The monetary ceiling of the cases to be referred to the Lok Adalats, organised by Civil Courts shall be ₹20 lakh. (2) A bank is permitted to participate in the Lok Adalats organized by the DRTs/DRATs for resolving cases involving ₹10 lakhs and above. (3) A bank is encouraged to use the forum of Lok Adalats for recovery of personal loans, credit card loans or housing loans with less than ₹10 lakh. E. 4 [***] 103. 5 [***] F. Projects Under Implementation 104. The instructions contained in this paragraphs 106 to 121 shall not apply to projects where financial closure has been achieved as on October 1, 2025, for which the prudential guidelines on project finance prevailing before October 1, 2025, which otherwise shall be treated as repealed, shall apply. 105. Notwithstanding the instructions in paragraph 104, any resolution of a fresh credit event and/or change in material terms and conditions in the loan contract in such projects, on or after October 1, 2025, shall be as per the guidelines contained in paragraphs 106 to 124. 106. A bank shall monitor the performance of the project and any buildup of stress on an ongoing basis and shall be expected to initiate a resolution plan well in advance. 107. Occurrence of a credit event with any lender during the construction phase, shall trigger a collective resolution in terms of Chapter III of these Directions. Explanation: The reference to ‘default’ in Chapter III of these Directions shall be read as ‘credit event’ for the purpose of project finance accounts, unless specified otherwise. 108. Any such credit event with a bank shall be reported to the Central Repository of Information on Large Credit (CRILC) by the bank in the prescribed weekly as well as the CRILC-Main report in compliance with paragraphs 17and 18 109. A bank, which is part of a consortium / multiple lending arrangement shall also report occurrence of such credit event to all other members of the consortium / multiple lending arrangement. 110. The instructions on CRILC reporting as per paragraph 108 shall be issued in due course. 111. A bank shall undertake a prima facie review of the borrower account during the Review Period. 112. The conduct of a bank during the Review Period, including signing of Inter Creditor Agreement (ICA), and the decision to implement a resolution plan, wherever required, shall be guided by Chapter III of these Directions, unless specified otherwise. 113. If a resolution plan involving extension of original / extended DCCO, as the case maybe, is implemented in a project finance account, which is classified as Standard and satisfies all relevant prudential conditions specified for sanction, disbursement and monitoring of project finance in the Reserve Bank of India (Small Finance Banks – Credit Facilities) Directions, 2025 , the asset classification of such account shall continue to be classified as ‘Standard’, provided the envisaged resolution plan ab initio conforms to the fol

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/DOR/2025-26/196 · issued 28 Nov 2025. The plain-English explanation above is BankPulse’s own independent summary.

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