MUMBAI : The Reserve Bank of India (RBI) on Friday issued a new prudential framework for resolution of stressed assets, effectively replacing its controversial 12 February 2018 circular with a mixed bag of norms applying to a wider class of lenders.

Three major changes mark the new circular: The central bank has made it voluntary for lenders to take defaulters to the bankruptcy court; the framework now applies to a larger universe of lenders, which includes small banks and non-banking finance companies (NBFCs); and penal provisions have been introduced for lenders.

The new norms leave it to the discretion of lenders and give them 30 days to start working on a resolution plan from the day of default. Earlier norms, struck down by the Supreme Court as too general in nature, stipulated that even a one-day default must be reported and acted upon.

The so-called one-day default norms were not received well by the industry and a section of lenders. After the norms came into force, power firms and associations from the power sector approached various high courts across the country. The cases were then consolidated in the Supreme Court, which in April 2018, quashed the 12 February circular.

Friday’s circular, while leaving it to lenders to take action, said that wherever necessary, RBI will direct banks to start insolvency proceedings for specific defaults. “The lenders may also choose to initiate legal proceedings for insolvency or recovery," said the new circular.

The regulator made these provisions applicable to non-banks and small finance banks. This essentially means that the lenders will also have to follow the early stress recognition guidelines of RBI. These specify that borrowers must be categorized into special mention accounts based on their delay in repayment. These categories are special mention account-0 (SMA-0) loans, where the repayment overdue is between 1-30 days, SMA-1 (31-60 days) and SMA-2 (61-90 days).

The revised circular follows RBI governor Shaktikanta Das’s statement, made in the aftermath of the Supreme Court judgement, that RBI will take “necessary steps, including issuance of a revised circular, as may be necessary, for expeditious and effective resolution of stressed assets".

The central bank said on Friday that lenders must put in place board-approved policies for resolution of stressed assets, including the timelines for resolution. It said that it ideally expects lenders to initiate the process of implementing a resolution plan (RP) even before a default.

Once a borrower is reported to be in default, lenders should start a review of the borrower account within 30 days of the default. “During this review period of thirty days, lenders may decide on the resolution strategy, including the nature of the RP, the approach for implementation of the RP," said RBI. The erstwhile guidelines had called for corrective action as soon as there was a default.

While the review period for defaulters of 2,000 crore and above will start immediately, the review period for defaulters between 1,500 crore and less than 2,000 crore will start only from 1 January 2020.

While the central bank has made it voluntary for lenders to use the Insolvency and Bankruptcy Code, it has, at a the same time, put in penal provisions for resolution plans that are not implemented. A lender will have to set aside 20% more provisions if the plan is not implemented within 210 days from the date of default and 35% if not implemented within 365 days of default.

Sapan Gupta, partner at law firm Shardul Amarchand Mangaldas, said: “The RBI circular is a mixed bag. The provisions on signing inter creditors agreement within 30 days of default will be practically difficult. Also, the additional provisioning is not a strong deterrent as many cases are already close to 100% provisioning. So the resolutions may get delayed. On the positive side, provisioning will be frozen when the resolution plan under IBC is pending with NCLT, hence, banks won’t be penalised for court delays. It will also give boost to interim finance market as that would be treated as a standard asset."

Following the 12 February circular, several petitioners—including GMR Energy Ltd, Punjab-based textile firm RattanIndia Power Ltd, Association of Power Producers (APP), Independent Power Producers Association of India, Sugar Manufacturing Association from Tamil Nadu, and a shipbuilding association from Gujarat—had intervened in the matter in different courts.

Last September, the Supreme Court had granted interim relief to stressed power firms, directing lenders to maintain a status quo on the RBI circular for banks to resolve these cases within 180 days. The apex court directed that all pleas filed by RBI relating to the February circular should be transferred to it.

“Even though the revised framework does away with implementation of resolution plan for borrowers overdue by up to 30 days, the overall framework is positive and will continue to incentivise banks for accelerated resolution of stressed assets," said Karthik Srinivasan, group head (financial sector ratings), Icra.

The RBI circular also mandated signing of inter-creditor agreement (ICA) by all lenders. “In cases where RP is to be implemented, all lenders shall enter into an inter-creditor agreement during the review period to provide for ground rules for finalization and implementation of the RP in respect of borrowers with credit facilities from more than one lender," said the central bank.

The ICA, RBI said, will provide that any decision agreed upon by lenders representing by value 75% of total outstanding credit facilities (fund based as well non-fund based) and 60% of lenders by number shall be binding upon all the lenders.

Close