RBI's revised framework for stressed assets

For last 1 year, everyday we keep reading or hearing in print and media something or the other about loan defaults committed by big corporations ensuing in escalation of non-performing assets (NPA) burden on the public and private sector banks. In addition, Bank of Baroda and Punjab National Bank are in the grip of fraudulent banking activities.

To make it worse, India’s largest and most reliable State Bank of India (SBI) reported losses for the first time in almost two decades and SBI losses are nothing but the reflection of NPA crisis - This shows the severity and magnitude of the NPA crisis.

This has caused a considerable drain in the Indian banking system. NPA crisis is now challenging the survival of India banking system as the bad loans are piling up like never before - crippling the stability of the banks.

This serves as a severe warning to Reserve Bank of India (RBI). Recognising the imminent need to firmly and diligently deal with the NPA crisis to salvage the Indian Banking system from ongoing crisis, the RBI has issued a notification a couple of days back to restructure stressed asset resolution charter and to withdraw existing norms.

The ideology behind the issuance of notification is to provide a harmonised and simplified generic framework for handling NPA cases by replacing existing policies.

Another dimension of the notification is to supplement the Insolvency and Bankruptcy Code (IBC) and strengthen the existing governing structure dealing with insolvency cases for swift disposal of insolvency cases.

Gist of Key policies changes effected by RBI in relation to NPA:

·        From April 1, 2018 onwards lenders are obligated to report credit information including classification of an account as SMA (Special Mention Accounts) on monthly basis to Central Repository of Information on Large Credits (CRILC) on all borrower entities having aggregate exposure of 50 million INR or more.

·        Starting from February 23, 2018, lenders are further obligated to report to CRILC information of all borrower entities in default (with aggregate exposure of 50 million INR or more), on a weekly basis.

·        Resolution Plan (RP) will be deemed implemented provided the following conditions are satisfied:

a)     The borrower entity is no longer in default with any of the lenders.

b)     If the resolution involves restructuring then all related documentation should be completed by all lenders and the new capital structure and modified terms of existing loans should reflected in the lenders and the borrower books.

·        RPs (involving restructuring) of ‘large’ default accounts worth 1 billion INR or more in aggregate is required independent credit evaluation (ICE) of the residual debt by RBI authorized credit rating agencies (CRAs) and accounts worth 5 billion INR or more in aggregate requires two such ICEs.

·        RPs which receive a credit opinion of RP4 or better for the residual debt from one or two CRAs are eligible for implementation.

·        With effect from March 1, 2018 (Reference Date), RP of default accounts worth 20 billion INR in aggregate shall be implemented within 180 days from the Reference Date (for existing default cases) and 180 days from the date of first such default (for default cases after Reference Date).

·        If such RP is not implemented within specified time period then lenders shall file insolvency application under the IBC within 15 days from expiry of specified time period.

·        For default accounts worth below 20 billion INR and 1 billion INR or more in aggregate, RBI intends to announce, over a two-year period, reference dates for implementing the RP to ensure calibrated, time-bound resolution of all such accounts in default.

·        For the avoidance of doubt, certain borrower entities are not eligible to transition arrangement if RBI already issued instructions to banks to refer such entities under IBC.

·        The provisioning in respect of exposure to borrower entities (facing Insolvency proceedings under IBC) shall be as per their asset classification in terms of the Master Circular on Prudential norms on Income Recognition, Asset Classification and Provisioning.

·        Lenders failure to comply with the obligations imposed by the RBI will be subjected to stringent supervisory / enforcement actions by the RBI.

·        Banks are obligated to divulge appropriate disclosures in their financial statements, under ‘Notes on Accounts’, relating to resolution plans implemented.

·        Restructuring in respect of projects under implementation involving deferment of date of commencement of commercial operations will continue to govern by the relevant regulations and are not covered under this notification.

·        Existing instructions on resolution of stressed assets such as Framework for Revitalising Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR, and Scheme for Sustainable Structuring of Stressed Assets (S4A) are substituted with the revised guidelines.

·        Joint Lenders Forum as an institutional mechanism for resolution of stressed accounts is dissolved.

It is hoped that a serious implementation of revised guidelines will fasten up the resolution process of defaulting cases, aid lenders in swift recovery of loans and ensure sure lenders act more diligently in handling stressed assets leaving no margin for fraud or misconception of accounts.

This ultimately build a robust debt recovery mechanism in place and salvage banks from ongoing NPA crisis.

 Research and inputs by Paruchuri Baswanth Mohan