Mumbai: Two months after the Supreme Court struck down the February 12 circular, the Reserve Bank Friday issued a revised framework for resolving stressed assets by offering lenders a 30-day period to label an account an NPA but has withdrawn all other resolution methods.
The new directions, effective immediately, retain the basic spirits of the February 12, 2018 circular as it mandates higher provisioning, bankruptcy options as well as do not allow any other resolution methods outside the new norms.
The central bank said in a notification said the new norms provide a framework for early recognition, reporting and time-bound resolution of stressed assets.
The new norms mandate lenders to put in place board-approved policies for resolution of stressed assets, including the timelines for resolution.
The new framework offers some leeway on provisioning for stresed accounts, which will help banks with low capital.
Now lenders will have to make 35% provisions— first 20% for 180 days and then an additional 15% if no resolution is found within 365 days.
The apex court had on April 2 struck down the stringent RBI circular calling it ultra vires, issued on February 12, 2018, for resolving bad loans under which a company could be labelled an NPA if it missed repayment even for a day, and banks were to find a resolution within 180 days or else it should be sent to bankruptcy courts.
The new norms are applicable to all borrowers with exposure of ₹2,000 crore and above to banks, financial institutions like Nabard, Exim Bank, Sidbi,small finance banks and NBFCs, with immediate effect, the monetary authority said.
"Once a borrower is reported to be in default by any lender, others should undertake a review of the borrower account within 30 days from such default, to be called as 'review period'," the RBI said.
During the 30-day review period, lenders may decide on resolution strategy, approach for implementation of resolution plan, it said, adding lenders may also choose to initiate legal proceedings for insolvency or recovery.
In cases where resolution plans are to be implemented, all lenders shall enter into an inter-creditor agreement (ICA), during the review period, the RBI said, adding the ICA shall provide any decision agreed by lenders representing 75% by value of total outstanding credit facilities and 60% of lenders by number shall be binding upon all the lenders, helping speed up the resolution process.
Legal experts hailed the new framework as it retains the core of the February 12 circular as it offers a mechanism that will enable resolutions through requisite majority.
"This framework builds on the February 12, 2018 circular and provides for a mechanism that will enable resolutions through requisite majority. The stipulation of an inter-creditor agreement will enable banks to collectively decide resolutions outside the IBC," L Viswanathan, a partner at law firm Cyril Amarchand Mangaldas told PTI.
Another law firm Economic Laws Practice specialising in NCLT cases said the new norms address the fundamental reasons that led to the Supreme Court to strike down the February 12 circular.
"The new norms are uniform in as much as it applies to banks, financial institutions and NBFCs alike. Hopefully, NPA resolution will now pick up speed," its managing partner Suhail Nathani said.
The RBI said accounts with aggregate exposure above ₹2,000 crore, resolution plan shall be implemented within 180 days from the end of the 30-day review period.
For borrowers with exposure between ₹1,500 crore and ₹2,000 crore, the new norms will be applicable from January 1, 2020, while for loans up to ₹1,500 crore will be announced in due course.
"Lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA-0,SMA-1 and SMA-2),"RBI said.
Under the new norms, lenders shall have to report credit information, including classification of an account as SMA to the central repository of information on large credits on all borrowers having aggregate exposure of ₹5 crore and above with them.
The central bank said since default with any lender is a lagging indicator of financial stress faced by a borrower, it is expected that the lenders initiate the process of implementing a resolution plan even before a default.
Resolution plans involving restructuring/change in ownership in respect of accounts where the aggregate exposure is ₹100 crore and above, will require independent credit evaluation (ICEs) of the residual debt by RBI-authorised credit rating agencies.
Accounts with exposure of ₹500 crore and above will require two ICEs implementation of such resolution plan, the RBI said, adding in case where a viable resolution plan is not implemented within the timelines, all lenders will have to make additional provisions 20% if a resolution is not implemented within 180 days from the end of review period.
An additional provision of 15% (total provisioning of 35%) will have to be made if no resolution is found within 365 days of the review period.
The RBI also warned that any action by lenders to conceal the actual status of accounts or evergreening the stressed accounts, will be subjected to stringent supervisory/enforcement actions as deemed, including, higher provisioning on such accounts and monetary penalties.
The central bank asked lenders to make disclosures in their financial statements, under 'notes on accounts', relating to resolutions plans implemented.
The new norms replaces all the earlier resolution plans such as the framework for revitalising distressed assets, corporate debt restructuring scheme, flexible structuring of existing long-term project loans, strategic debt restructuring scheme, change in ownership outside SDR, and scheme for sustainable structuring of stressed assets, and the joint lenders' forum with immediate effect.
The Supreme Court order came in on a petition filed by the central bank challenging the Allahabad High Court order which had asked it and the finance ministry to treat the power sector NPAs separately as their woes were mostly driven by external factors.
Power sector companies, which were affected the most by the circular, argued that their outstanding loans of ₹5.65 lakh crore (as of March 2018) were a result of factors beyond their control such as unavailability of fuel and cancellation of coal blocks by the apex court/government and non-payment by state-run discoms.
GMR Energy, RattanIndia Power, Association of Power Producers, Independent Power Producers Association of India, Sugar Manufacturing Association from Tamil Nadu and a shipbuilding association from Gujarat had moved different courts against the circular.
The petitioners had challenged the circular arguing that applying a 180-day limit to all sectors of the economy without going into the special problems faced by each sector would treat "unequals equally" and would be arbitrary and discriminatory, and therefore, violative of Article 14 of the Constitution.
According to Icra, February 12 circular impacted loans worth ₹3.8 lakh crore across 70 large borrowers of which ₹2 lakh crore of 34 borrowers were in the power sector. Of this, 92% were classified as NPAs as of March 2018 and also made provisions of over 25-40%.