Date June 14, 2019
Reserve Bank of India relaxes norms for stressed assets

On 7 June 2019, the Reserve Bank of India (RBI) issued the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019 (Directions), with the intent of ‘providing a framework for early recognition, reporting and time bound resolution of stressed assets.’

The Directions replace the Resolution of Stressed Assets – Revised Framework Circular (2018 Circular) issued by the RBI on 12 February 2018 which was struck down by the Supreme Court  of India in the case of Dharani Sugars and Chemicals Ltd. v. Union of India & Ors on 2 April 2019.

The key highlights of the Directions are as follows:

Applicability

The Directions apply to small finance banks and non-banking financial institutions (NBFCs) in addition to scheduled commercial banks (excluding regional rural banks) and All India Term financial institutions. Small finance banks and NBFCs were not included under the 2018 Circular.

Reporting requirements

For early identification of stressed assets, the RBI retained its reporting requirements wherein lenders are required to report credit information, including classification of an account as a Special Mention Account to Central Repository of Information on Large Credits on borrowers with aggregate exposure of INR 50,000,000 (Rupees Fifty million) and above and a weekly report of instances of default by all borrowers (with aggregate exposure of INR 50,000,000 (Rupees Fifty million) and above).

Framework of Resolution Plan

  • As per the Directions, all lenders must formulate Board-approved policies for resolution of stressed assets, including the timelines for resolution.
  • Once a borrower is in default, lenders (only scheduled commercial banks, All India Term financial institutions and small finance banks) are to undertake a prima facie review of the borrower’s account within 30 days of such default (Review Period) and decide on a resolution strategy including a resolution plan (Resolution Plan).  The lenders can decide on a means of resolution either by way of a Resolution Plan or to initiate legal proceedings for insolvency or recovery.
  • The Review Period is stated to commence from the reference date (Reference Date) or from the first date of default after the Reference Date. The Directions have provided for Reference Dates based on the monetary exposure of the borrower to the lenders. For borrowers with aggregate exposure of INR 20,000,000,000/- (Rupees Twenty Billion) and above, the Reference Date commenced upon the date of issuance of the Directions i.e. 7 June 2019.
  • The Directions also mandate that all lenders enter into an inter-creditor arrangement (ICA), which may include the rights and duties of majority lenders, protection of dissenting lenders and differential treatment of lenders with priority in cash flows/ security interest, etc. Asset reconstruction companies that have exposure to the borrower shall also sign the ICA and be bound to its provisions.
  • The ICA shall provide that any decision agreed upon by 75% or more of holders of credit facilities of the borrower (fund and non-fund based) and 60% of lenders shall be binding upon all lenders, however, the Resolution Plan shall provide for payment not less than liquidation value to dissenting lenders.

Implementation of Resolution Plans

Resolution Plans are to be implemented within a 180 (one-hundred and eighty) day period from the end of the Review Period where borrowers meet the exposure thresholds set out in the Directions.

In the event, lenders fail to implement the Resolution Plans within 180 (one-hundred and eighty) days, they would have to provide additional provisions of 20% (twenty percent). If such period exceeds 365 (three hundred and sixty-five) days, additional provisions of 35% (inclusive of 20%) would have to be provided by the lenders. Additional provisioning would also be required in the event lenders have initiated recovery proceedings which have not completed by the 180 (one-hundred and eighty) day period.

Status of pending proceedings

  • As per the Directions, lenders shall not reverse the provisions maintained as on 2 April 2019 in respect of any borrower unless the reversal is a consequence of an asset classification upgrade or recovery or resolution following the instructions of the Directions.
  • Resolution plans pending at present may be pursued by lenders under the Directions subject to meeting its requirements.  The Directions are not applicable to borrower entities where specific directions have already been issued by the RBI to such banks to initiate proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). As per the Directions, lenders are to pursue such cases as per the specific instructions issued to them.

No bar to specific directions for initiation of insolvency resolution process

The RBI has reserved its right to issue specific directions for initiation of the insolvency resolution process against specific borrowers under the IBC.

The Circular can be accessed through the following link:

https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11580