BackLenders seek clarity on handling cases already under restructuring
Banks have also sought clarity on inter-bank coordination andvoting onresolutionplans
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Mumbai: Lenders seeking to comply with the latest rules on recognizing and acting on bad loans have approached the central bank for greater clarity on handling cases already under restructuring, inter-bank coordination and voting on resolution plans.
On 12 February, the Reserve Bank of India (RBI) ended several forms of loan recast, including strategic debt restructuring (SDR) and scheme for sustainable structuring of stressed assets (S4A), and made the resolution process time-bound. It also discontinued the joint lenders’ forum (JLF), an institutional mechanism for approval and implementation of resolution plans.
The new rules stipulate that starting 1 March, lenders must implement a resolution plan within 180 days for accounts of at least Rs2,000 crore, failing which the defaulted borrowers must be referred for insolvency proceedings. These large accounts include those where banks have initiated resolution and are classified as restructured standard assets. Banks are sitting on stressed assets of over Rs10 trillion, of which gross non-performing assets are at Rs8.86 trillion as at end of December.
In other cases, banks get a 180-day period, starting the date of default, to finalize a resolution plan. The account has to be tagged as special mention as soon as there is a default.
Lenders have sought additional time to resolve these accounts instead of pressing on the 180-day deadline, said the first person, a senior official with a large state-owned bank on condition of anonymity.
“In the case of large accounts, most exposures are through the consortium format. But there are also cases of loans under multiple banking formats. With JLF being dismantled, we have written to RBI on how to go about the resolution process and coordination among different lenders. This is important as banks have to act as soon as there is default even with one lender, and the resolution has to be time-bound," said the second person, a senior official of Mumbai-based bank, also on condition of anonymity.
According to Karthik Srinivasan, group head of financial sector ratings at Icra Ltd, the flexibility available through the JLF voting system will no longer be available to banks.
“While it will be difficult for banks to readily agree to a resolution plan, they will not be left with much choice but find common ground as the haircuts may be steep otherwise," he said.
On the resolution plan, two senior officials of leading public sector banks based out of Mumbai said it would help to have a regulatory framework that can be used as template for restructuring proposals entailing reduction in loan rates and haircuts. Since the new framework does not specify how lenders may clear a resolution plan, it is assumed that approval from all banks is required.
“However, getting all lenders on board is seen as challenging and could lead to delay in decision making," the first banker cited above said. Under JLF, decisions agreed to by 60% of creditors by value and 50% by number was sufficient for a corrective action plan.
According to analysts tracking the banking sector, with the revised norms, there is a high probability that around Rs1.9-2 trillion of restructured loan pool, including SDR, S4A and others, will be referred to the Insolvency and Bankruptcy Code (IBC).
The banks are also seeking clarification on certain SDR accounts which are at various stages of implementation because an IBC reference can lead to higher provisioning requirements, the second banker said.
“Only accounts where SDR has been implemented are governed by the revised framework. There are various stages in SDR post invocation, including but not limited to debt-to-equity conversion and getting on board a new promoter. We should expect some more details on which stage should be taken as reference under the new framework," said Udit Kariwala, associate director–financial institutions, India Ratings.
According to new RBI norms, in case the resolution plan involves change in the ownership structure of the defaulting firm, the account should not be in default at any point during the specified period, which is the time between implementation of the plan and the date where up to 20% of the outstanding principal debt is repaid. If there is a default in the specified period, the account must be referred for IBC proceedings.
Currently, lenders are finalizing resolution plans for 11 of the 12 accounts in RBI’s first defaulter list and referred to bankruptcy court. They are also filing insolvency petitions for some of the 28 accounts which were part of central bank’s second defaulter list.
Gopika Gopakumar contributed to this story.
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