Guidelines Issued on Government Debt Relief Schemes

The Reserve Bank of India (RBI) has introduced a framework to manage stressed borrower accounts effectively, aligning with existing principles for financial stability. These guidelines build upon earlier frameworks, including the Prudential Framework for Resolution of Stressed Assets (June 2019) and the Framework for Compromise Settlements and Technical Write-offs (June 2023), to address challenges in debt relief schemes and ensure robust credit discipline.

State Governments often announce Debt Relief Schemes (DRS) to support specific borrower segments. While these schemes aim to alleviate financial stress, frequent or poorly structured DRS can have significant implications for credit culture and financial stability. To ensure prudence and alignment with regulatory norms, the Reserve Bank of India (RBI) has outlined a structured approach for regulated entities (REs) participating in DRS.

Regulated entities can decide on participation in any DRS based on their board-approved policies and regulatory guidelines. During the consultation phase, any provisions of the scheme that may impact borrowers’ long-term interests or require prudential adjustments must be highlighted to the concerned authorities through State Level Bankers’ Committees (SLBCs) or District-Level Consultative Committees (DCCs).

Additionally, REs are responsible for clearly determining the final outstanding amounts for borrowers covered under the DRS. This includes accumulated interest in non-performing accounts to enable the government to budget appropriately for its fiscal commitments.

Lending institutions must ensure that borrowers are selected strictly in accordance with the scheme’s terms to prevent disputes or denial of admission on technical grounds. Moreover, borrowers should be fully informed about:

• The terms and conditions of the scheme.
• Prudential considerations like the cooling period for new loans.
• Impacts on credit scores.
• Explicit consent must be obtained from borrowers before they are enrolled in the DRS.

The Model Operating Procedure (MOP) provides a structured approach for designing and implementing DRS.

Scope and Design: DRS covers debt obligations of a targeted borrower segment, requiring fiscal authorities to fund these liabilities, often involving partial or full waiver of the lending institution’s dues. To maintain credit discipline, such schemes should only be introduced as a last resort when other measures to alleviate financial stress have been exhausted. Broad-based relief measures should be addressed through Direct Benefit Transfers (DBT) rather than DRS.

Announcements and Notifications: Every DRS notification must specify the stress situation necessitating the scheme and include comprehensive design features. This ensures that the scheme:

i) Targets only the affected borrowers.

ii) Does not inadvertently compromise financial stability.

iii) Adheres to all relevant regulatory guidelines.

Key Considerations

i) Borrower eligibility must be determined objectively.

ii) Schemes should clearly outline funding requirements, timelines, and mechanisms for addressing delays in settlement.

iii) Lending institutions should not create receivables against the government for DRS funds until these are received. Instead, exposure to the borrower remains active until obligations are fully settled.

The framework emphasizes collaboration between governments, lenders, and regulators to balance borrower relief with financial discipline. This proactive and consultative approach ensures sustainable credit systems while supporting vulnerable borrowers.