Resolution of Stressed Assets: Latest framework

In the light of Hon’ble Supreme Court order dated April 2, 2019, which held the RBI circular dated February 12, 2018 on Resolution of Stressed Assets as ultra vires, the Reserve Bank of India on Friday (June 7, 2019) released fresh guidelines to deal with bad loans. The new directions shall be called the ‘Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019’ and these directions shall come into force with immediate effect.

New NPA resolution norms replace all the previous models (S4A, SDR, 5/25 etc.). The independent credit evaluation and the implementation of new norms by the lenders are subject to the specified timeline. Further, defaults are to be recognized within 30 days in place of earlier mandate that the lenders to start resolution even if there was a one-day default.   During this review period of 30 days, lenders may decide on the resolution strategy, including the nature of the resolution plan (RP) and the approach for implementation of the RP.

The fundamental principles underlying the regulatory approach for resolution of stressed assets as per new guidelines are as under:

1. Early recognition and reporting of default in respect of large borrowers having aggregate exposure of ₹5 crore and above by Scheduled commercial banks and small banks (excluding RRBs), FIs((NABARD, NHB, EXIM Bank, and SIDBI) and NBFCs (Non-Deposit taking Non-Banking Financial Companies (NBFC-ND-SI) and Deposit taking Non-Banking Financial Companies (NBFC-D).
2. Lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA) as per the following categories on the basis of principal and interest payment wholly or partly overdue between  -SMA-0        (1-30 days), SMA-1 (31-60 days), SMA-2                (61-90 days).  In the case of revolving credit facilities like cash credit, the SMA sub-categories will be  on the basis of outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for a period of SMA-1(31-60 days), SMA-2 (61-90 days).
3. Lenders shall report credit information, including classification of an account as SMA to Central Repository of Information on Large Credits (CRILC), on all borrowers having aggregate exposure of ₹ 50 million (₹5 crore) and above with them. The CRILC-Main Report shall be submitted on a monthly basis. In addition, the lenders shall submit a weekly report of instances of default by all borrowers (with aggregate exposure of ₹ 50 million and above) by close of business on every Friday, or the preceding working day if Friday happens to be a holiday.
4. Lenders must put in place their board-approved policies for resolution of stressed assets.
5. It is expected that the lenders initiate the process of implementing a resolution plan (RP) even before a default.
6. In cases where RP is to be implemented by joint lenders, all lenders shall mandatorily enter into an inter-creditor agreement (ICA) which will provide for a majority decision making criteria.
7. For the purpose of restructuring, the definition of ‘financial difficulty’ to be aligned with the guidelines issued by the Basel Committee on Banking Supervision.
8. A system of disincentives in the form of additional provisioning for delay in implementation of resolution plan or initiation of insolvency proceedings. Where a viable RP in respect of a borrower is not implemented within the timelines given below, all lenders shall make additional provisions as under:(i)            180 days from the end of Review Period               20%

   (ii)           365 days from the commencement of Review Period     15% (i.e. total additional provisioning of 35%)

   The additional provisions shall be made by all the lenders with exposure, subject to the total provisions held being capped at 100% of total outstanding. The additional provisions shall also be required to be made in cases where the lenders have initiated recovery proceedings, unless the recovery proceedings are fully completed.

9. The above additional provisions may be reversed as under: (i) Where the RP involves only payment of overdues by the borrower – the additional provisions may be reversed only if the borrower is not in default for a period of 6 months from the date of clearing of the overdues with all the lenders; (ii) Where RP involves restructuring/change in ownership outside IBC – the additional provisions may be reversed upon implementation of the RP. (iii) Where resolution is pursued under IBC – half of the additional provisions made may be reversed on filing of insolvency application and the remaining additional provisions may be reversed upon admission of the borrower into the insolvency resolution process under IBC; or,(iv) Where assignment of debt/recovery proceedings are initiated – the additional provisions may be reversed upon completion of the assignment of debt/recovery.
10. Withdrawal of asset classification dispensations on restructuring. Future upgrades to be contingent on a meaningful demonstration of satisfactory performance for a reasonable period.
11. Resolution plans shall provide for payment not less than the liquidation value due to the dissenting lenders.
12. On accounts with aggregate exposure above a threshold with lenders, resolution plan is to be implemented within 180 days from review period and lenders shall undertake a review of the borrower account within thirty days from default.

The following mechanism for resolution of stressed accounts stands discontinued under new guidelines.

a) The mandatory institutional mechanism for Joint Lenders’ Forum (JLF) for resolution of stressed accounts.

b) Framework for revitalising distressed assets,

c) The extant instructions on corporate debt restructuring scheme, and flexible structuring of existing long term project loans.

d) The extant instructions on strategic debt restructuring scheme, change in ownership outside SDR and the extant instructions on scheme for sustainable structuring of stressed assets.

Further, the resolution plan is not available to borrowers to whom specific instructions have already been issued for initiation of insolvency proceedings under IBC.Borrowers who have committed frauds/malfeasance/wilful default will remain ineligible for restructuring.

Under the new guidelines, the lenders are free to initiate legal proceedings for insolvency or recovery. RBI said intent to evergreen stressed accounts by lenders will be subjected to stringent actions including higher provisioning & monetary penalties. The banking regulator further said that the resolution plan underway as on date of circular may be pursued by lenders under revised framework subject to meeting specified conditions. Further it is notified that “Notwithstanding anything contained in this framework, wherever necessary, RBI will issue directions to banks for initiation of insolvency proceedings against borrowers for specific defaults so that the momentum towards effective resolution remains uncompromised”.