RBI today released FAQs on the resolution framework for Covid-19 related stress, clarifying to borrowers as well as lenders that a loan account that was due for more than 30 days as of March 1, 2020, but subsequently got regularised, will not be ineligible for resolution under the COVID-19 resolution framework. The above clarification was given by the Central bank because of various queries raised by stakeholders on the restructuring framework in terms of the August 6, 2020 circular. What sets apart the new framework from June 7, 2019, circular is the benefit of retaining a standard asset classification despite a recast, leading to lower provisions. Banks have to make provisions of 15% when loans turn bad, as opposed to 0.4-1% for standard loans. However, such accounts may still be resolved under the prudential framework dated June 7, 2019, the central bank said.
RBI said that banks and financial institutions can use the resolution framework for resolution of all exposures to eligible borrowers, including investment exposures. The eligible borrowers’ accounts should continue to be classified as Standard till the date of invocation of resolution under this framework. For this purpose, the date of invocation shall be the date on which both the borrower and lending institution have agreed to proceed with a resolution plan under this framework.
Some of the important calrifications provided by RBI are as under;
The reference date for the outstanding amount of debt that may be considered for resolution shall be March 1, 2020 i.e, the requirement that the borrowers should be classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020. The actual debt that may be considered for resolution will be the outstanding as on the date of invocation. The date of invocation refers to the date when the borrower and the lender agree on the resolution plan. Lenders have up to 180 days to implement a corporate debt recast and 90 days for retail loans from the date of invocation. RBI has set a deadline of 31 December for invocation of resolution plan.
RBI said that banks and financial institutions can use the resolution framework for the resolution of all exposures to eligible borrowers, including investment exposures. However, The farm credit exposures except for credit to allied activities like dairy, fishery, animal husbandry, poultry, bee-keeping, and sericulture are excluded from the scope of the Resolution Framework. This rule for resolution framework applies to all lending institutions, including NBFCs. Nevertheless, the loans given to farmer households would be eligible for resolution if they do not meet any other conditions for exclusions listed in the resolution framework.
In response to an enquiry on whether microfinance loans to individuals, including JLG borrowers, Loans sanctioned to Self Help Groups (SHGs) engaged in non-farm activities are eligible to the benefit under the Resolution Framework, the Central Bank clarified that all loans meeting the eligibility criteria, unless covered by the specific exclusions of farm credit fall within the scope of resolution under the framework.
Resolution of Stress in Personal Loans:
Personal Loans shall be applicable to resolution of personal loans sanctioned to individual borrowers by lending institutions. However, credit facilities provided by lending institutions to their own personnel/staff shall not be eligible for resolution under this framework.
Definition of MSME:
The definition of MSME had been changed by the Government vide Gazette notification dated June 26, 2020. As the reference date for the Resolution Framework is March 1, 2020, the definition of MSME that would be applicable is the one that existed as on March 1, 2020.
RBI said that banks and financial institutions can use the resolution framework for the resolution of all exposures to eligible borrowers, including investment exposures. The lending institutions shall ensure that the resolution under this facility is extended only to borrowers having stress on account of Covid19. Further, the lending institutions will be required to assess the viability of the resolution plan, subject to the prudential boundaries laid out by the five-member panel led by KV Kamath expert committee which identified five financial parameters to gauge the health of sectors facing difficulties. These include total outside liabilities to adjusted tangible net worth, total debt to earnings before interest, taxes, depreciation, and amortization (Ebitda), debt service coverage ratio (DSCR), current ratio, and average debt service coverage ratio (ADSCR). The committee submitted its report to RBI on 4 September, and its recommendations were broadly accepted. Towards this end, each lending institution shall put in place a Board approved policy detailing the manner in which such evaluation may be done and the objective criteria that may be applied while considering the resolution plan in each case.
The resolution plan shall be deemed to be implemented only if all of the following conditions are met:
- all related documentation, including execution of necessary agreements between lending institutions and borrower and collaterals provided, if any, are completed by the lenders concerned in consonance with the resolution plan being implemented;
- The changes in the terms of conditions of the loans get duly reflected in the books of the lending institutions; and, borrower is not in default with the lending institution as per the revised terms.