Banking, RBI & Payments

RBI's Framework for Resolution of Stressed Assets: What Replaced the Old Circular

CA Nikhil Gupta·July 2026· RBI Prudential Framework for Resolution of Stressed Assets, June 2019 RBI REGULATION

Reviewed by CA Nikhil Gupta · Last reviewed 17 July 2026

RBI's attempt to force banks into rigid, near-automatic insolvency referrals on a single day of default got struck down by the Supreme Court — the framework that replaced it gives lenders genuine discretion, but with real financial consequences attached to delay.

What came before: the February 12, 2018 circular

RBI's earlier framework (the February 12, 2018 circular) took a notably rigid approach — requiring lenders to initiate a resolution process (which, for large accounts, effectively meant referring the borrower to insolvency proceedings under IBC) if a resolution plan wasn't implemented within a specified short window, triggered even by a single day of default on payment obligations for accounts above a specified exposure threshold.

Why the Supreme Court struck it down

⚠ The problem wasn't the policy goal — it was RBI's statutory authority to impose it this way. In Dharani Sugars and Chemicals Ltd v. Union of India (2019), the Supreme Court held the February 12, 2018 circular to be ultra vires — beyond RBI's power — because Section 35AA of the Banking Regulation Act requires the central government to specifically authorise RBI to direct banks to initiate insolvency proceedings against particular categories of defaults, and RBI had issued the sweeping, sector-wide directive without that specific government authorisation. The Court's objection was fundamentally about the statutory process RBI used, not a rejection of stricter stressed-asset discipline as a policy goal.

What replaced it: the June 7, 2019 framework

RBI's Prudential Framework for Resolution of Stressed Assets (June 7, 2019) restored greater lender discretion while still creating strong incentives for timely resolution:

Upon a default, lenders have a Review Period (up to 30 days) to assess the account and decide on the resolution approach.
If lenders decide to pursue a resolution plan (rather than immediately referring the account to insolvency), they must enter into an Inter-Creditor Agreement (ICA) — binding all lenders who are part of the agreement to the process, addressing coordination problems where individual lenders previously had incentives to act unilaterally.
A resolution plan must be implemented within a specified timeline from the date of default (commonly referenced as 180 days for larger exposures), failing which lenders face additional provisioning requirements — a financial disincentive for delay, rather than an automatic insolvency-referral mandate.

Why this design is meaningfully different

Instead of RBI mandating a specific procedural outcome (insolvency referral) on a rigid single-day-default trigger, the current framework creates a financial cost (higher provisioning, hitting the lender's own capital position) for delay beyond the specified timeline — letting lenders retain the commercial judgment to pursue restructuring, a change of ownership, or other resolution routes outside formal insolvency, while still facing a real regulatory consequence if resolution genuinely drags on without progress.

What this means practically for a stressed borrower

A borrower facing default has somewhat more room to negotiate a workable resolution with lenders under the current framework compared to the 2018 circular's rigid trigger — but the provisioning-cost incentive on lenders means they are not indifferent to delay either; both sides have a genuine incentive to reach a workable resolution within the framework's timelines rather than letting the account drift.

Frequently Asked Questions

Does this framework apply to all bank loans, or only large corporate exposures? ▼

While the framework applies to lender-borrower relationships broadly, the specific provisions (Review Period, mandatory ICA for a resolution plan, provisioning consequences) have been most consequential for larger corporate exposures above specified thresholds — smaller retail and MSME lending relationships are subject to somewhat different, often more standardised, resolution/restructuring approaches.

Can a lender still refer a defaulting borrower to insolvency proceedings under this framework? ▼

Yes — the framework doesn't prevent lenders from pursuing insolvency proceedings under IBC; it simply removes the previous rigid, near-automatic RBI-mandated trigger for doing so, leaving lenders (individually or collectively through the ICA process) with genuine discretion over whether insolvency, restructuring, or another resolution route is the appropriate path for a specific stressed account.

What is an Inter-Creditor Agreement, and why does it matter? ▼

An ICA is a binding agreement among a borrower's multiple lenders that establishes an agreed decision-making process (typically requiring a specified majority of lenders by value to approve a resolution plan) for handling a stressed account collectively — it addresses the coordination failure risk where individual lenders, acting unilaterally, might pursue conflicting recovery strategies that undermine an otherwise viable resolution for the borrower.

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Primary category: Banking, RBI & Payments
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