New Stressed Assets Resolution Framework: RBI's Nudge with Carrot-and-Stick Approach
CA Prakash Sinha (Partner, Prakash Sachin & Co.)
The RBI on June 7th, 2019 has come up with the new directions called “Prudential Framework for Resolution of Stressed Assets”. The objective of this circular is provide a framework of recognition, reporting and time bound resolution of stressed assets. The directions had been issued in terms of the power to the RBI under Section 35AA of the Banking Regulation Act, 1949.
This direction has its own significance because it has been brought by the RBI after quashing of the February 12th, 2019 circular by the honorable Supreme Court in case of Reserve Bank of India vs. Dharani Sugars & Chemicals Ltd. as reported in [LSI-134-SC-2019(NDEL)].
The most important feature of this circular is not only the recognition or reporting but the time bound recognition of the stressed assets. It is important to note that these resolution of the stressed assets is outside the ambit of IBC.
On the early identification and reporting of the stressed assets, the directions states that lender shall recognize the stressed assets immediately on default and after this it has to classify such assets as special mention Amount (SMA). The SMA-0, SMA-1, SMA-2 is based on the number of days when the principal or interest (even partly) is overdue. For default in the Cash credit amount SMA-1, SMA-2 had to be given.
On the reporting front, the RBI states that the lender should report such SMA account to CRILC (Central Repository of Information on Large Credits) on all borrowers having aggregate exposure of Rs. 5 crores & above. It is the monthly report apart from the weekly report which is submitted on the instant of default on each Friday.
Resolution plan (RP)
The RBI states that within 30 days of the default (Review Period of 30 days) the lenders must place board approved policy for resolution of the stressed assets during this review period the lender may decide on the resolution strategy, including nature of RP and approach on the implementation of RP.
In case the lenders agrees that RP is to be implemented the lenders enter into the Inter -creditor agreement (ICA). The ICA shall provide that RP should be agreed by lenders representing 75% of outstanding value and 60% of the lenders by number. Suitable safeguards for dissenting lender had also been prescribed.
Reference date
The RBI further provides that resolution should be implemented within 180 days of the reference date. The reference date for different threshold had been prescribed as below:-
Aggregate exposure of the borrower to lenders like Scheduled Commercial Banks (excluding Regional Rural Banks);All India Term Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI);Small Finance Banks; and, | Reference date |
₹ 20 billion and above | Date of these Directions |
₹ 15 billion and above, but less than ₹ 20 billion | January 1, 2020 |
Less than ₹ 15 billion | To be announced in due course |
Delayed implementation of the RP
Where the viable RP in respect of borrower is not implemented within 180 days than the lender had to make additional provisions of the total outstanding demands as under:
Timeline for implementation of viable RP | Additional provisions to be made as a % of total outstanding, if RP not implemented within the timeline |
180 days from the end of Review Period | 20% |
365 days from the commencement of Review Period | 15% (i.e. total additional provisioning of 35%) |
The RBI will act as the supervisor and any action by lenders with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory / enforcement actions as deemed appropriate by the Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary penalties.
Conclusion
To conclude, the new direction which are brought in by the RBI are quite fair in respect of both banks and borrowers as now without deploying any force on the banks to enter into IBC but by the route of provisioning norm, it had compelled the banks to think for the Resolution plans which actually works in place. For the borrower also it was not convenient for being dragged into the IBC where at the extreme, the promoter could lose all his ownership of the Company. Now through the revised directions taking the defaulting company into IBC is an option and not mandatory.
The new directions details the intention of the RBI that if the banks cannot be mandated to realized their debts but they can be nudged by the innovative policy of the reporting and provisioning requirements mentioned in the RBI circular to revive their NPAs for the growth of the economy.