India's banking system spent the better part of two decades trying to figure out what to do when borrowers stopped paying. The answer kept changing. First came the Corporate Debt Restructuring mechanism in the early 2000s, then the Joint Lenders' Forum and Corrective Action Plan in February 2014, then the Strategic Debt Restructuring Scheme in June 2015, and finally the Scheme for Sustainable Structuring of Stressed Assets (S4A) in June 2016. Each scheme gave banks more tools and more time. None of them solved the problem. Non-performing assets kept climbing.
The fundamental issue was incentive — and understanding why each scheme failed matters. Every resolution scheme gave banks regulatory forbearance — the ability to keep restructured loans classified as standard assets, avoid provisioning, and defer the recognition of losses. Banks used these mechanisms not to resolve stress but to hide it, because the short-term cost of honest classification was always higher than the cost of kicking the can down the road. The result was a wall of unrecognised NPAs that, when the RBI finally forced recognition through the Asset Quality Review of 2015-16, turned out to be far larger than anyone had publicly admitted.
In February 2018, the RBI tried something radical. It scrapped every existing resolution scheme in a single circular — the Joint Lenders' Forum, the CDR mechanism, SDR, S4A, all of it — and replaced them with a unified framework that gave lenders exactly 180 days to implement a resolution plan for any large account in default, or refer it to the Insolvency and Bankruptcy Code. There was no regulatory forbearance. No asset classification benefit for restructuring. The February 12, 2018 circular was the most aggressive regulatory intervention in India's banking history.
It lasted fourteen months. In April 2019, the Supreme Court struck it down as ultra vires, ruling that the RBI could not direct banks to initiate insolvency proceedings against specific borrowers without a government authorisation under Section 35AA of the Banking Regulation Act. The reason the court drew the line there was straightforward: Parliament had created a specific mechanism for government-directed insolvency referrals, and the RBI had bypassed it. The entire framework collapsed overnight.
The June 2019 Prudential Framework
Two months after the Supreme Court's order, the RBI issued the Prudential Framework for Resolution of Stressed Assets (RBI/2018-19/203, June 7, 2019). This time, the approach was different. Instead of mandating insolvency referrals, the framework used provisioning penalties to incentivise timely resolution. The logic was simple: if banks did not resolve a stressed account quickly, the cost of holding it would escalate until resolution became the only rational choice.
The framework introduced a precise timeline. When any borrower defaults with any lender, the clock starts. Lenders must complete a prima facie review within 30 days — the Review Period. If resolution is needed, they must sign an Inter-Creditor Agreement during this window. Then:
"In respect of accounts with aggregate exposure above a threshold with the lenders... RP shall be implemented within 180 days from the end of Review Period." — RBI Prudential Framework, Para 11
If the resolution plan is not implemented within 180 days, additional provisioning of 20% of total outstanding hits every lender's books. At 365 days from the start of the Review Period, it rises to 35%. These provisions apply regardless of the security held — they are additional to whatever the asset classification already requires.
The Inter-Creditor Agreement itself carries binding force. Any decision agreed by lenders representing 75% by value of total outstanding credit facilities and 60% by number binds all signatories, including dissenters. This eliminated the holdout problem that had crippled earlier resolution mechanisms, where a single lender could block a restructuring that every other bank supported. The reason for the specific thresholds — 75% by value, 60% by number — was to balance decisiveness against minority lender protection, ensuring that neither a few large banks nor a swarm of small ones could unilaterally drive outcomes.
Reporting Infrastructure: CRILC
None of this works without data. The foundation is the Central Repository of Information on Large Credits (CRILC), established in May 2014, which requires every lender to report credit information on all borrowers with aggregate exposure of Rs 5 crore and above. Weekly default reporting ensures the RBI knows, within days, when a large borrower has stopped paying anyone. The SMA classification system — SMA-0 for 1-30 days overdue, SMA-1 for 31-60 days, SMA-2 for 61-90 days — provides the early warning mechanism.
"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." — Commercial Banks Resolution Directions 2025, Para 21
That warning is not theoretical, and it exists because banks had a long history of using classification games to avoid provisioning. The RBI's enforcement record shows repeated penalties for misclassification. Yes Bank was penalised Rs 6 crore in October 2017 for non-compliance with income recognition and asset classification norms — and that was before the full scale of its NPA concealment became apparent.
The November 2025 Consolidation
On November 28, 2025, the RBI issued the Reserve Bank of India (Commercial Banks – Resolution of Stressed Assets) Directions, 2025 (RBI/DOR/2025-26/165). This Master Direction superseded the June 2019 Prudential Framework — which had been withdrawn and absorbed — along with subsequent amendments, consolidating everything into a single entity-specific direction for commercial banks.
The 2025 Directions preserve the core architecture: the 30-day Review Period, the 180-day implementation window, the escalating provisioning penalties, and the binding ICA mechanism. But they add several refinements. The definition of "signs of financial difficulty" is now explicitly codified, drawing from the Basel Committee's guidelines on prudential treatment of problem assets. Banks must maintain Board-approved policies covering not just resolution timelines but also quantitative and qualitative parameters for identifying financial difficulty — catching stress before default, not after.
Parallel directions cover every other entity type: NBFCs, All India Financial Institutions, Urban Co-operative Banks, Regional Rural Banks, and Small Finance Banks. The resolution framework is no longer a standalone circular — it is embedded in the regulatory architecture of every supervised entity.
The press release accompanying the original June 2019 framework noted that the Supreme Court had held the February 2018 circular ultra vires, and that the Governor's April 2019 statement had committed to issuing a revised framework "that will strengthen the system." Seven years and one complete regulatory reorganisation later, that framework governs every loan default in the Indian banking system.
Governing Master Direction: Reserve Bank of India (Commercial Banks – Resolution of Stressed Assets) Directions, 2025 (RBI_MD_13145)
Companion articles:
- What Happens After a Loan Goes Bad
- The 90-Day Rule
- What Happens to a Wilful Defaulter
- Why Banks Must Report Fraud
Last updated: April 2026