How RBI’s 2025 Stressed Assets Directions Reshape the Prudential Framework

The RBI’s Reserve Bank of India (Commercial Banks – Resolution of Stressed Assets) Directions, 2025 (‘Directions’) represent the most significant revision to the stressed asset framework since the introduction of the Prudential Framework for Resolution of Stressed Assets dated June 7, 2019 (‘2019 Framework’). While the Directions largely retain the architecture of the 2019 Framework, they also reflect RBI’s evolving approach towards stress recognition, lender accountability and resolution of distressed credit exposures.

Several core features of the 2019 Framework remain unchanged, including the 30 days review period, the central role of inter-creditor arrangements, and the approval thresholds of 75% by value and 60% by number for resolution plans. The requirement for independent credit evaluation for larger restructuring transactions has also been retained. However, the Directions introduce a number of important refinements that indicate a clear regulatory preference for earlier identification of stress and proactive lender intervention. Perhaps the most significant conceptual change is the shift from a framework primarily triggered by payment default to one focused on the identification of financial difficulty. Under the 2019 Framework, lenders typically initiated formal resolution efforts only after the occurrence of a default. In practice, this often resulted in resolution discussions commencing after significant deterioration in business operations and enterprise value had already occurred.

The Directions seek to address this concern by requiring lenders to maintain board approved policies for identifying signs of financial difficulty and to initiate corrective action before payment defaults materialise. The Directions identify various indicators of emerging stress, including deteriorating cash flows, adverse internal credit assessments, operational challenges and circumstances suggesting that the borrower may face difficulty servicing its obligations in the foreseeable future. This represents a notable shift in regulatory philosophy. The RBI is effectively signalling that default should not be viewed as the starting point of the resolution process. Instead, lenders are expected to identify stress at an earlier stage and explore resolution measures while the prospects of rehabilitation remain viable.

The Directions also place greater emphasis on governance and decision making processes. Banks are now required to maintain detailed board approved policies dealing with stressed asset resolution, compromise settlements and technical write-offs. The RBI has simultaneously reinforced its concerns regarding evergreening and delayed recognition of stress, making it clear that attempts to conceal asset quality deterioration may attract supervisory scrutiny and enforcement action.

Another noteworthy development is the incorporation of compromise settlements into the broader stressed asset framework. Historically governed through separate regulatory guidance, compromise settlements are now expressly recognised as a resolution tool and subject to prescribed governance and approval processes. The Directions also clarify that lenders may enter into compromise settlements with borrowers classified as wilful defaulters or fraud accounts without prejudice to ongoing criminal or enforcement proceedings. This reflects a pragmatic recognition that recovery objectives and criminal accountability may often need to proceed independently.

While these developments are important, the most significant change for infrastructure and project finance lenders lies elsewhere. A key feature of the Directions is the integration of project finance stress resolution into the broader stressed asset framework. This change must be read together with Chapter VII of the Reserve Bank of India (Commercial Banks- Credit Facilities) Directions, 2025 (Credit Facilities Directions), which also governs resolution plans for project finance exposures. The introduction of the concept of a ‘credit event’ is central to this framework. Unlike the 2019 Framework, where resolution efforts were largely linked to payment defaults, lenders may now be required to evaluate corrective measures upon the occurrence of implementation stage stress events. These may include the need for extension of the Date of Commencement of Commercial Operations (DCCO), cost overruns, delays in achieving project milestones, additional funding requirements or other indicators that project viability may be affected.

This is an important departure from the earlier approach. In project finance transactions, value erosion frequently occurs during construction and implementation rather than after debt servicing obligations commence. By the time a repayment default occurs, delays, cost overruns and contractual disputes may already have substantially impaired the project’s prospects. The revised framework therefore seeks to facilitate intervention at a stage where corrective measures are still capable of preserving value and ensuring project completion.

As per the new Directions once a credit event occurs, lenders are expected to assess whether the project remains viable and whether a resolution plan can restore long term sustainability. The focus is therefore not merely on restructuring debt obligations but on preserving the viability of the underlying project itself. Resolution plans may consequently involve a wide range of measures, including additional equity contributions by sponsors, induction of new investors, revision of project costs, modification of implementation schedules, restructuring of financing arrangements and rescheduling of debt obligations. Another important safeguard introduced through the Credit Facilities Directions is the restriction on repayment tenor. The original or revised repayment tenor, including any moratorium period, cannot exceed 85% of the economic life of the project. The RBI is therefore seeking to ensure that restructuring remains anchored to the project’s underlying economics and does not become a mechanism for indefinite postponement of repayment obligations. Lenders are expected to continuously monitor implementation milestones, funding requirements, project progress and other indicators of stress, and to initiate corrective measures well before distress crystallises into repayment default.

While the core structure of the 2019 Framework remains intact, the Directions represent an important evolution in regulatory expectations. The emphasis is no longer solely on resolving distress after default occurs, but on identifying stress early, preserving value and facilitating rehabilitation wherever possible. The integration of project finance resolution into the broader stressed asset framework, coupled with the introduction of credit event based intervention mechanisms, reflects the RBI’s recognition that successful project resolution often depends on action taken during implementation rather than after default.