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Joint Lenders’ Forum Rules: Explained

Published on Tuesday, May 09, 2017
“The problem of Non-Performing Assets relates to top 20-30-40 accounts. Either these people bring in joint venture partners or bring in new management. Today insolvency mechanism is here. This mechanism can now work more effectively” Shri Arun Jaitley, Union Finance Minister.


After “The Banking Regulation (Amendment) Ordinance, 2017, having been promulgated on May 04, 2017, empowering the Reserve Bank of India (RBI) with the new vast powers to deal with banks' non-performing assets (NPAs); RBI on May 06, 2017 issued a fresh directive to banks for timely
implementation of Corrective Action Plans (CAPs) to be decided by the 'Joint Lenders’ Forum’ (JLF). Insertion of sections 35AA and 35AB in the Banking Regulation Act, 1949 through the current ordinance will ensure that the power of initiating the insolvency proceedings under the Insolvency and Bankruptcy Code would remain with the RBI.

Framework to Deal with the Problem of NPAs: 

  • The Framework for Revitalizing Distressed Assets in the Economy – Guidelines on Joint Lenders' Forum (JLF) and Corrective Action Plan (CAP) specifies various timelines within which lender banks have to decide and implement through the CAP. 
  • The Framework also includes disincentives, in the form of asset classification and accelerated provisioning where lenders fail to adhere to the provisions of the framework. 
  • RBI noted that delays have been observed in the past in the finalization and implementation of the CAP, leading to delays in resolution of the bad loans in the banking system. 

New Clarifications: 

  • After the ordinance having been passed by the Union Cabinet on May 03, 2017 and signed by the Honourable President of India on May 04, 2017, RBI has now stated that under the JLF Rules CAPs can also include resolution by way of flexible structuring of loans, change in ownership under strategic debt restructuring, scheme for sustainable structuring of stressed assets etc, these have to be implemented in an expeditious manner. 
  • RBI has directed lenders to conscientiously adhere to the timelines prescribed in the framework for finalizing and implementing the CAP. RBI and the banks concerned will sit and draw up a list of about 40 top defaulters for resolving the issue of mounting NPAs and to initiate insolvency process and set up committees in relation to JLF. 
  • RBI has stated in a written circular to the banks, ''The decisions agreed upon by a minimum of 60 per cent of creditors by value and 50 per cent of creditors by number in the JLF would be considered as the basis for deciding the CAP, and will be binding on all lenders, subject to the exit (by substitution) option available in the framework. Lenders should ensure that their representatives in the JLF are equipped with appropriate mandates, and that decisions taken at the JLF are implemented by the lenders within the timelines.” 

JLF Rules issued by RBI specifically mention that:

  • The stand of the participating banks while voting on the final proposal before the JLF should be unambiguous and unconditional; 
  • Any bank which does not support the majority decision on the CAP may exit subject to substitution within the stipulated time line, failing which it would have to abide by the decision of the JLF; 
  • The bank should implement the JLF decision without any additional conditionality; 
  • Banks' boards should empower their executives to implement the JLF decision without requiring further approval from the board. 
  • Non-adherence to the instructions and timelines under the framework shall attract monetary penalties. 
  • Decision of JLF shall be binding on all banks and no bank board will have the power to overrule it. 

Caution to the Banks: 

  • RBI has cautioned banks that non-adherence to the instructions and timelines specified under the framework will attract monetary penalties on them under the provisions of the Banking Regulation Act 1949. 
  • The steps taken by the RBI under the ordinance will be binding on all banks may be public sector banks or the private sector banks. 
  • In the end, it may be mentioned here that RBI had already powers under the Bankruptcy Code passed by the Indian Parliament on May 18, 2016 for dealing with the NPAs. 
  • Besides this, two other laws, “The provisions of the Debt Recover Tribunal (DRT) Act, 1993 and “The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002” enabled the RBI to exercise powers coupled with actions through the JLF. 
  • But now this ordinance would vest wide-ranging powers with the RBI in the matter of stressed assets (called bad loans or NPAs in common terms) of the banks and it is widely hoped that the problem of NPAs of the banks would be minimized and with more funds would be available with the banks after having realized the NPAs – the banks would be able to lend these funds afresh and the rate of economic growth measured through Gross Domestic Product (GDP) will grow upwards. 
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