assets has been one of avoiding the de jure recognition of non - performance of such accounts. this is why we have a history of a large number of cases of failed restructuring as the schemes were used for avoiding a downgrade rather than resolving the asset. prolonging the true asset quality recognition suited both the bankers and the borrowers. the former could make their books look cleaner than they actually were ; the latter could avoid the defaulter tag even while, in fact defaulting. governor had referred to this in his march 14, 2018 speech ( www. rbi. org. in / home. aspx ) as the borrower - banker nexus, which may not have a pejorative connotation, but implied that the banks indulged in the proverbial act of extending and pretending. it is instructive to mention here that most cases where the sdr scheme was invoked did not result in change of management, implying that the scheme was used only for the asset classification benefit during the standstill period of 18 months. the strike rate in case of s4a was somewhat better, because there were preconditions to the applicability of the scheme and the overseeing committee ( oc ) ensured strict adherence to the framework upfront. however, the total value of such cases in the overall scheme of things was not that significant. 12. the amendments to the banking regulation act, 1949 empowering the reserve bank to direct banks to refer specific cases of default for resolution under ibc were a clear indication that an external nudge was required for banks to file insolvency application against large borrowers. as you may be aware, rbi constituted an internal advisory committee ( iac ) in 2017 to determine cases to be referred under ibc. based on its recommendations, a total of 41 accounts were identified for such reference in two tranches. the iac opined that rbi should evolve a steadystate framework for filing insolvency applications in future, rather than identify cases itself periodically. the new paradigm 13. the recommendation of the iac made eminent sense for the following reasons. firstly, the ibc is a comprehensive and time - bound framework for dealing with corporate stress. secondly, a clear articulation of policy in this regard will bring certainty to all the stakeholders. thirdly, a steady - state framework for reference under ibc was the logical outcome of the amendments to the br act ; it would not have been equitable, if the

create demand for fresh investment, which may further accelerate growth. the reserve bank believes that a focused framework for resolution of distressed borrowers which respects and enforces the sanctity of the debt contract is required to make sure that the excesses observed during the last credit cycle are not repeated and we don ’ t end up in a similar situation few years down the line. 25. there is also an important equity perspective to the revised framework. as successive financial stability reports of the reserve bank have pointed out, the proportion of stressed assets in the larger advances is higher than the share of larger advances in the total advances ( see chart below ). if the stress in larger advances is not handled in a manner such that both probability of default and loss given default are contained, the resultant low risk - adjusted return on bank assets may have to be compensated in the form of higher borrowing rates for the smaller borrowers. alternatively, it may mean a low return on bank equity, which may have externalities through the fiscal channel given the principal shareholder of many stressed banks is the government. 6 / 9 bis central bankers'speeches there is another issue from the equity perspective. one must understand that smaller firms and new entrants, which create dynamism and enterprise within sectors of the economy, get unfairly competed out when large borrowers are routinely able to obtain soft landing even upon defaults and under - performance. 26. finally, you may be knowing that banks are required to keep provisions for loans on their books, to cover for future expected losses. this means that as the likelihood of income or recovery from a loan decreases, the amount to be kept as provisions by the banks should increase. if the resulting drain on bank profits has to be contained, the action to address stressed assets should commence no sooner than the emergence of early signs of stress. thus, bankers should be alive to the increase in risk as the probability of default increases and take adequate measures to contain the loss given default, such as through loan covenants, increased collateral, and / or higher risk premium, with promptitude. if such measures are not undertaken in time, it becomes too late to do anything outside of bankruptcy proceedings. the following table and graph provide enough evidence to suggest that quicker action by banks while the borrowing business is still a going concern results in much lower loan loss. it is instructive to note that the resolution regime has a bearing on the ease of doing business ranking of a country and the new framework alongwith the