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Government Debt Relief Schemes (DRS)

Reserve Bank of India (RBI) has issued guidelines on Government Debt Relief Schemes (DRS). The guidelines include (i) model operating procedure (MOP) shared with the State Governments for their consideration while designing and implementing DRS and (ii) prudential guidelines for the Regulated Entities (REs).

Model operating procedure (MOP) shared with the State Governments for their consideration while designing and implementing DRS

What is Government Debt Relief Scheme (DRS)?

Debt Relief Schemes (DRS) refer to schemes notified by the State Governments that entail funding by the fiscal authorities to cover debt obligations of a targeted segment of borrowers that the lending institutions are required to sacrifice / waive. 

What are the pre-requisites for announcing DRS?

  • Announcement / notification of DRS should include the specific stress or distress situation necessitating announcement of such support. DRS should be considered only as a measure of last resort when other measures to alleviate financial stress have failed.
  • Before announcing any DRS, Governments may engage with the State Level Bankers’ Committee (SLBC) / District level Consultative Committee (DCC) to evolve a coordinated action plan for conceptualisation, design, and implementation of the DRS. 
  • The schemes should cover critical aspects like identification of borrowers, impact assessment, implementation timelines, resolution of issues concerning settlement of dues by Government to the lending institutions, etc.
  • It should be ensured that the DRS do not impact the financial stability aspects of the region / State or create moral hazards in the borrower segments. 
  • Conformance to relevant regulatory guidelines on loan settlement, reporting to credit information companies etc. should also be taken into account. 

How shall DRS be designed?

  • The DRS should be targeted only at the impacted borrowers and should not contain any restrictive covenant against timely repayments. 
  • It should specify the criteria for determining eligible borrowers on an objective basis, detailed timeline of critical / material events, including cut-off dates for filing / submission, acknowledgement, approval and settlement of claims along with compensation clauses for delays in settling the funds, on part of the Government.
  • The DRS should cover the entire outstanding dues of the borrowers being covered, including principal and accumulated interest till the date of receipt of funds by the lending institutions from the Government.
  • The DRS should not require the creation of a receivable in the books of the lending institution against the Government. The exposure of lending institutions to the borrower shall continue and shall be reduced to the extent of funds received from the Government.
  • The entire implementation of the scheme and settlement of claims by the Governments to the banks, should generally be completed within 45 to 60 days.
  • The DRS should not contain any provision contrary to any regulatory instruction issued by RBI / NABARD.
  • The DRS should not contain any provision that casts any obligations on the lending institutions, directly or indirectly, to –
    • Waive / sacrifice a part or whole of its dues from the borrower.
    • Extend fresh credit to borrowers whose debt has been waived.
    • Make any commitments in anticipation of future budgetary support.
    • Stop pursuing legal avenues available to them, for recovery of dues from the borrower, pending receipt of funds from the Government.
  • However, if the lending institutions agree to any of the above at the time of design of DRS or subsequently, it shall be subject to the applicable prudential guidelines.

What shall be the budgetary provisions for DRS?

  • Detailed budgetary provisions / funding may be provided upfront towards any proposed DRS to fully cover the required settlement amounts. 
  • Where lenders have dues from the Government, pertaining to earlier DRS schemes, new schemes should be announced only on a fully pre-funded basis.

Prudential guidelines for the Regulated Entities (REs)

Which Regulated Entities (REs) can participate in DRS?

  • Regulated Entities (REs) may decide on participating in a particular DRS notified by a Government, based on its Board approved policy. 
  • Any provision of the scheme that may warrant modification in long term interest of the borrowers or for prudential reasons may be duly brought to the notice of the concerned authorities through SLBC / DCC, during the consultation phase while designing the DRS.
  • The REs shall clearly determine the eventual outstanding that may crystallise in their books in respect of the borrowers proposed to be covered under the DRS, including the accumulated interest in non-performing accounts, by the time the dues are settled under the DRS, to enable the Government to suitably arrange for the extent of fiscal participation.

How shall borrowers be selected under DRS?

  • The REs shall ensure that the borrowers to be covered under DRS are selected strictly as per terms of such schemes so as to avoid subsequent non-admission by the authorities on technical grounds.
  • The terms and conditions of the scheme as well as the prudential aspects, including cooling period for extending fresh credit, impact on credit score etc., shall be clearly communicated to the borrowers at the time of obtaining explicit consent from the borrower for availing benefits under the proposed DRS.

What should be the impact of DRS on loan accounts?

  • There shall not be creation of any receivable against the Government on account of the DRS and the exposure shall continue to be on the borrower till receipt of funds by the RE. 
  • Till receipt of funds, REs shall continue to apply the prudential norms including prudential norms on income recognition, asset classification and provisioning. 
  • Wherever the accounts are non-performing, REs may pursue recovery measures against such borrowers.
  • Any waiver of accrued but unrealised interest and / or sacrifice of principal undertaken by REs in the borrower accounts of beneficiaries of the DRS, either as part of the implementation of the DRS or subsequent to its implementation, shall be treated as a compromise settlement and shall attract the applicable prudential treatment.
  • If the funds received by the RE as part of the DRS covers the entire outstanding dues of the borrower, the same shall lead to extinguishment of borrower’s debt obligations.
  • In cases where the funds received by the RE as part of the scheme are not adequate to cover the entire outstanding dues of the borrower, the asset classification of the residual exposure shall be evaluated as per the terms and conditions of the original loan contract. Any changes / modifications to the terms and conditions of the original loan contract in such cases shall be evaluated against the test of restructuring and shall attract the prudential treatment therein.
  • Any fresh credit exposure to such borrowers shall be as per the commercial discretion of the RE.

What are other instructions?

In respect of relief measures announced prior to the introduction of the guidelines on DRS, any dues pending receipt from Government, for more than 90 days shall attract specific provision of 100%.


References

Reserve Bank of India. (2024, December 31). 'Government Debt Relief Schemes (DRS)'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12760&Mode=0


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