Regulation & Policy

Prudential Guidelines on Restructuring of Advances by Banks and Financial Institutions
Tough times don’t last, tough people do – goes the lyrics from Trace Adkins. All over the world, banks restructure their loans and advances – not to hide losses, but to help corporate borrowers survive tough times. On 31st January 2103, the Reserve Bank of India released their draft of the “Prudential Guidelines on Restructuring of Advances by Banks and Financial Institutions” for comments. The draft guidelines address a few core issues on restructuring of advances. ISCM Center for Risk Management reviews the salient points of the proposes guidelines and their impact.

Rules Vs. Discretion

There are two ways in which markets can be regulated – one is the good old rules based approach where a regulator clearly spells out the dos and don’ts and the institution follows it. The other is the discretionary approach, where the regulator qualifies an institution to use self assessment for compliance to regulations. Both these approaches have their own merits. However, in the wake of the current crisis, regulators and academicians around the world are debating the merits of rules versus discretion as a regulatory framework, and which of them will lead to a more stable financial system. Attention is also being focused on the institutional details that shape implementation and impact efficacy of either of the approaches.