Resolution of Stressed Assets-RBI Revised Framework
On February 13, 2018 RBI has come out with the new framework regarding resolution of stressed assets. The new norms seek for speedy resolution of bad loans in future. With this, existing debt restructuring schemes such as SDR (Strategic Debt Restructuring Scheme), S4A(Scheme for Sustainable Structuring of Stressed Assets), 5/25, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans (most of these we have discussed in previous CGS documents), have been withdrawn from immediate effect.
Need for new resolution process
Economy has been witnessing the problem of Non Performing Assets for a long period of time. Many initiatives were taken to tackle the problem which includes introducing of various schemes for restructuring of bad loans like corporate debt restructuring, 5/25 etc. However, the problem has not been abated and according to some estimates listed Indian banks saw bad loans jump to over Rs 8.4 lakh crore as of September 2017.
The most important concern is that the major chunk of NPAs recently reported is found to be slipped from the standard restructured accounts done under various schemes. For example-Bank of Baroda reported 5000 crore of accounts had slipped from restructured to NPAs once again in the last quarter of 2017.
Salient Features of New Norms
The following changes have been introduced by the RBI:
Early identification of stress
Now the banks have to immediately identify the stressed assets and classify them under following Special Mention Accounts as:
In addition to this all the lenders will have to report to the CRILC (Central Repository of Information on Large Credits) the credit information of all borrowing entities availing loans of 50 million and above on monthly basis starting from April 1, 2018. Moreover, report of all borrower entities in default of 50 million and above is submitted on weekly basis i.e every Friday or the proceeding working day if Friday happens to be a holiday. The first such weekly report will be submitted for the week ending February 23, 2018
Implementation of Resolution Plan (RP)
Earlier the resolution process was taken forward by the Joint Lenders Forum but now it has been disbanded. Now as soon as there is a default in the borrower’s entity account then the lenders has to initiate the steps singly or jointly to cure the defaults. The resolution plan can include any actions like regularization of account by payment of all the over dues by the borrowers, change in ownership of the defaulting entity, restructuring etc. If the resolution plan involves restructuring or change of ownership of accounts of more than 100 crore then an independent credit evaluation (ICE) of the residual debt will be done by the credit agencies appointed by RBI. Whereas the accounts with exposure of 500 crore and above will require two ICEs. Further a resolution plan is deemed to be implemented only when the borrower entity is no longer in default with any of the lenders.
Timelines for implementation of RP
Banks will have 180 days to implement the Resolution Plan where the default is of Rs2000 crore or above taking March 1, 2018 as the reference date. If the default is done after March 1, 2018 then 180 days will be calculated from the date of first default. It also includes those accounts where resolution process has already been initiated under any of the schemes as well as the accounts classified as restructured standard assets. If an RP is not implemented during the 180-day period, lenders will need to file an insolvency application under the Insolvency and Bankruptcy Code (IBC), within 15 days of the expiry of the timeline.
In case of defaults by the borrowers is above 100 crore and below 2000 crore, a timeline for implementation of resolution plans will be announced over a two year period.
However, it will not be applied to the accounts where insolvency action has already been initiated under the insolvency and bankruptcy code.
Cases of fraud and wilful defaulters
According to the new norms the borrowers who have done fraud and wilful default will not be eligible for restructuring. But if the erstwhile promoters are replaced by new promoters then lenders may take a view on restructuring of accounts based on the viability.
Strict implementation
If the lenders do not adhere to the timelines for resolution process, tries to conceal the status of accounts or indulge in ever greening of stressed assets then they will face strict actions will be taken by the RBI against them which may extent to imposing monetary penalties also.
Comment
The new norms are likely to increase some problems for borrowers as well as lenders in the short term including some challenges like agreeing on a resolution plan within 180 days especially when a number of lenders are involved, initial rise in NPAs of the banks because of the withdrawal of the restructuring schemes etc. However norms like early identification of stress, timely reporting of defaults to RBI, appropriate resolution process will ensure sound health of the financial system in the long run.
