The Reserve Bank of India ("RBI") in exercise of its powers under the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934 on 12th February, 2018 brought in a revised framework for resolution of stressed assets to overhaul the existing framework, in the wake of rising non-performing assets (NPAs). The revised framework is in consonance with and gives more power to the Insolvency and Bankruptcy Code, 2016 ("Code") and provides for time bound resolution of stressed assets. It replaces the earlier framework including the framework for Revitalising Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR, and Scheme for Sustainable Structuring of Stressed Assets (S4A) and abolishes the institution of Joint Lenders' Forum (JLF).
The key features of the framework are discussed herein below:
- Identification - The Lenders are required to identify incipient stress in loan accounts on the occurrence of a default and further classify the stressed assets as special mention accounts (SMA), categorised into SMA-0, SMA-1 and SMA-2, where the principal or interest payment or any other amount wholly or partly overdue between 1-30 days, 30-60 days and 60-90 days respectively. The aforesaid categorisation is the same as it was in the earlier framework.
- Reporting - The
framework provides provisions for regular reporting to the Central
Repository of Information on Large Credits (CRILC), which are as
- Reporting of SMAs- Where an account having an aggregate exposure of INR 50 million and above, is classified as SMA;
- The CRILIC-Main Report – This report comprises of four sections i.e. Section 1: Exposure to Large Borrowers (Global Operations), Section 2: Reporting of Technically/Prudentially Written-off Accounts (Global Operations), Section 3: Reporting of Balance in Current Account (Global Operations) and Section 4: Reporting of Non cooperative Borrowers (Global Operations).1 This was earlier required to be submitted on a quarterly basis. However, under the revised framework, it has to be submitted on a monthly basis; and
- Weekly Report - A weekly report regarding all borrower entities in default with aggregate exposure (fund based and non fund based) of INR 50 million and above has to be submitted at the close of business on every Friday or the preceding working day if Friday happens to be a holiday, starting from February 23, 2018.
- Applicability - The framework is applicable to all accounts which also include such accounts where any of the predecessor schemes have been invoked but not yet implemented. There are many accounts which are already undergoing restructuring under the old framework, transition to the new framework may create an anomalous situation in certain circumstances. Although the intention is to resolve such accounts promptly and efficiently, it is only with the passing of time that a smooth transition can be ensured.
- Resolution - As stated above, the framework emphasises on resolution of the stressed assets. For this purpose, the framework mandates the lenders to have in place a board approved policy for resolution of stressed assets. As soon as there is a default, the lenders (individually or jointly) are required to act in accordance with the said resolution plan in order to cure the default. The resolution plan may provide for any action or plan to resolve the account. It is however pertinent to note that securing 100% approval from lenders for a resolution plan will be difficult or may be impossible in certain cases. Despite the above, by providing a mandatory provision to formulate a resolution plan, the framework attempts to shift the approach from recovery to corporate rescue, which in turn leads to maximisation of value of assets and is thus good for the economy.
- Stringent Timelines - The framework provides for stringent timelines for resolution of a large account where the aggregate exposure is INR 20 billion and above, on or after 1st March, 2018 ('reference date'). This also includes accounts which are currently undergoing restructuring under the old framework. The resolution plan is to be implemented within a period of 180 days from the reference date if there is default as on the reference date or the date of first such default if there is default after the reference date, as the case may be.
- Conditions for a Resolution
Plan to be deemed as "implemented"- There are
certain conditions which are required to be fulfilled in order for
a resolution plan to be deemed as "implemented":
- No default - the borrower entity shall no longer be in default with any of the lenders.
- Documentation - where the plan involves restructuring, all related documentation shall be completed by the lenders;
- Accounts - the new capital structure and/or changes in the terms of conditions of the existing loans shall be duly reflected in the books of all the lenders and the borrower;
- Independent Credit Evaluation - Where the restructuring is in respect of a large account2, there shall be independent credit evaluation (ICE) of the residual debt, by credit rating agencies (CRAs) specifically authorised by the RBI for this purpose. The accounts with aggregate exposure of INR 5 billion and above shall require two such ICEs.
- Credit opinion of RP4 - resolution plans which receive a credit opinion of RP43 or better for the residual debt from one or two CRAs, as the case may be, shall be considered for implementation. This requirement is also applicable to restructuring of all large accounts even if the restructuring is carried out before the 'reference date'.
- Reference under the
Insolvency and Bankruptcy Code - One of the most
significant aspects of the framework is that in case the resolution
is not implemented, the lender(s) shall compulsorily file an
insolvency application under the Code within 15 days from the date
of expiry of the timeline stated above. Moreover, where the
resolution plan is implemented within the 180-day period, the
account should not be in default at any point of time during the
'specified period'4, failing which the lenders
shall file an insolvency application, singly or jointly, under the
Code within 15 days from the date of such default. This is surely a
forward step which is in line with the intent and object of the
Code. However, as the Code is still at its infancy stage and the
infrastructure is currently developing, it may take some time for
the framework to fully achieve its objective.
Where the aggregate exposure of the lenders is below INR 20 billion and, at or above INR 1 billion, the Reserve Bank is yet to announce, over a two-year period, reference dates for implementing the resolution plan. A Major number of accounts come under this category; however, in the absence of a reference date, nothing can be done with regard to these accounts for the time being and they are left in the lurch.
- Review and penalties - The framework subjects the lenders to constant review and imposes penalties in the event lenders fail to meet the prescribed timelines or conceal the status of accounts.
- Cases of frauds/wilful defaulters – The framework keeps into account the recent steps taken to prevent wilful defaulters and promoters from taking any undue advantage whilst the company is undergoing resolution, by incorporating a provision that borrowers who have committed frauds/ malfeasance/ wilful default will remain ineligible for restructuring. However, there is an exception in cases where the existing promoters are replaced by new promoters, and the borrower company is totally delinked from such erstwhile promoters/management, lenders may take a view on restructuring such accounts based on their viability, without prejudice to the continuance of criminal action against the erstwhile promoters/management.
The framework is indeed a major step to overhaul the existing system to resolve the stressed assets. However, there are certain steps which may have to be taken to ensure a smooth transition from the old framework to the new framework. The framework requires the lenders to bring into line the treatment of specific accounts across their books i.e. if one bank has treated a particular account as an NPA, other lenders on the same account will have to treat it as an NPA in their books as well, which will invariably lead to an increase in the number of NPAs. Also the Code is at an infancy stage and is currently undergoing a lot of changes with almost every passing day. These issues may delay the process and would have to be constantly monitored and looked into. Banks in India have always had the mindset to recover the debt with no attempts to actually rescue the corporate from liquidation. This framework endeavours to shift this paradigm approach. When the Code was brought into force, not many banks came forward due to the provisioning which banks have to make once decided to proceed under the Code. Consequently RBI had to take steps to ensure that the banks initiate action under the Code. The revised framework mandatorily requires the banks to make resolution plans, which will certainly help India in developing a robust insolvency resolution regime.
1.Guidelines on reporting to Central Repository of Information on Large Credits (CRILIC) dated 22nd May, 2014.
2. Large accounts are accounts where the aggregate exposure of lenders is INR 1 billion and above (Resolution of Stressed Assets – Revised Framework dated 12th February, 2018, Reserve Bank of India).
3. Debt facilities/instruments with this symbol are considered to have moderate degree of safety regarding timely servicing of financial obligations. Such debt facilities/instruments carry moderate credit risk (See Resolution of Stressed Assets – Revised Framework dated 12th February, 2018, Reserve Bank of India).
4. 'Specified period' means the period from the date of implementation of RP up to the date by which at least 20 percent of the outstanding principal debt as per the RP and interest capitalisation sanctioned as part of the restructuring, if any, is repaid.
Provided that the specified period cannot end before one year from the commencement of the first payment of interest or principal (whichever is later) on the credit facility with longest period of moratorium under the terms of RP (See Resolution of Stressed Assets – Revised Framework dated 12th February, 2018, Reserve Bank of India).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.