Following the quashing of its ‘revised framework for resolution of stressed assets’ by the Supreme Court in April, the Reserve Bank of India on Friday issued a ‘prudential framework for resolution of stressed assets’, giving lenders leeway to review a borrower account within 30 days of default.
However, it stipulates additional provisions in case of delayed implementation of the resolution plan (RP).
The new framework gives lenders a breather from the one-day default rule whereby they had to draw up an RP for implementation within 180 days of the first default.
It gives lenders (scheduled commercial banks, all-India financial institutions and small finance banks) 30 days to review the borrower account on default.
Resolution strategy
During this review period, lenders may decide on the resolution strategy, including the nature of the RP and the approach for its implementation. Lenders may also choose to initiate legal proceedings for insolvency or recovery.
Since default with any lender is a lagging indicator of financial stress faced by the borrower, the circular said, “it is expected that the lenders initiate the process of implementing an RP even before a default.”
While the defunct circular was applicable only to Scheduled Commercial Banks (excluding Regional Rural Banks) and all-India financial institutions, the new circular is also applicable to small finance banks and systemically important non-deposit taking non-banking financial companies (NBFCs) and deposit-taking NBFCs.
In cases where the RP is to be implemented, all lenders have to enter into an inter-creditor agreement (ICA) for the resolution of stressed assets during the review period to provide for ground rules for finalisation and implementation of the RP in respect of borrowers with credit facilities from more than one lender.
Under the ICA, any decision agreed to by the lenders representing 75 per cent of total outstanding credit facilities by value and 60 per cent by number will be binding upon all the lenders. In particular, the RPs will provide for payment which will not be less than the liquidation value due to the dissenting lenders.
In cases where the aggregate exposure of a borrower to lenders (scheduled commercial banks, all-India financial institutions and small finance banks) is ₹2,000 crore and above, the RP has to be implemented within 180 days from the end of the review period, and the reference date has been set as June 7, 2019.
In the case of borrowers in the ₹1,500 crore and above but less than ₹2,000 crore category, January 1, 2020 has been set as the reference date for implementing the RP. In the less than ₹1,500 crore category, the RBI will announce the reference date in due course.
Additional provisions
If the implementation of an RP crosses the stipulated 180 days from the end of the review period, the lenders have to make additional provisions of 20 per cent of the outstanding loan. If this timeline exceeds 365 days, they further have to make a provision of 15 per cent.
These additional provisions are over and above the provisions already held or the provisions required to be made as per the asset classification status of the borrower account.
Ramnath Pradeep, former Chairman & Managing Director of Corporation Bank, said the circular is silent on the role of NBFCs in the implementation of the RP in case they report a borrower as being in default and the role of borrowers.
What the circular says
* Lenders will get a breather from the one-day default norm
* They will get a 30-day review period to frame a resolution strategy
* They have to submit a weekly report to the RBI on defaults by borrowers with exposure of ₹5 crore and above
* New norms also applicable to small finance banks and large NBFCs