RBI’s New Stressed Asset Framework: Experts Weigh In

Two months after the Supreme Court of India struck down the Reserve Bank of India’s February 12, 2018 circular on stressed asset resolution, the regulator has released a new set of rules.

Key changes made as part of the new circular include:

• Banks have been given a 30-day ‘review’ period after an account delays payments.
• Following the 30-day period, banks have 180 days to finalise a resolution plan.
• If a plan is not finalised within 180 days, additional provision of 20 percent will be imposed.
• For accounts where a resolution plan hasn’t been finalised even within 365 days, a provision of 35 percent will be imposed.
• If an account is referred to the Insolvency and Bankruptcy Code, additional provisions can be written back once an account is admitted.
• Should an account be resolved outside the IBC, additional provisions can only be written back once resolution plan is implemented.
• The rules, which earlier applied to banks, have been extended to non bank financial companies too.

Bankers and analysts that BloombergQuint spoke to felt the new rules are more practical than the original circular. While some provisions have been eased, the broad thrust on speeding up resolution remains in place, they said.

VG Kannan, CEO, Indian Banks’ Association

• The circular has provided a lot of clarity to the issues raised by bankers and it gives significant relief to banks compared to the earlier rules.
• One significant relief is that banks no longer have to start resolution on one-day default. A review period of 30-days have now been given before starting resolution.
• Disincentives via increased provisions have been put in place to avoid a delay in resolution. Incentives have been given for resolution via IBC, where provisions can be reversed.
• NBFCs have now been covered, which will help in cases where NBFCs have large exposures.
• Finally, an account can now be upgraded after 10 percent of the outstanding amount is paid compared to 20 percent earlier.

Abizer Diwanji, EY India

• Under the Feb 12, 2018 circular, the one-day default norm was a problem as sometimes it led to an over-reaction by banks, even if payments were delayed for a short period of time. Under the new circular, there is a period of 30-days for lenders to review the account.
• The RBI has also asked lenders to sign an Inter-Creditor-Agreement (ICA) within 30 days of a resolution plan being initiated. This is a good move because so far there have been inordinate delays because bankers could not come to an agreement. The ICA will mean that a resolution plan can be implemented once 75 percent of creditors agree. The other creditors will have to go along with the plan or sell their exposure.
• The additional provision of 35 percent prescribed if an account is not resolved for 365 days from the end of the review period is harsh for banks in this capital deficit-environment.
• The RBI has allowed upgradation of an account so as long as there is a 10 percent recovery of the outstanding loans. Earlier the requirement was that 20 percent of the accounts would need to be recovered for an account to be upgraded.
  

Karthik Srinivasan, ICRA Ltd

• This circular is more practical in nature than the previous circular. It incentivises banks to implement a proper resolution plan, after which they can release the additional provisioning.
• Effectively the provisioning requirement is 15 percent (for an NPA account) plus 35 percent (for a delay of over 365 days) depending on the situation and case. I see this as a minimum provisioning requirement as the circular does not stop banks from making additional provisions. Depending on the cases, provisions could be higher.
• Incentives to reverse 50 percent of these provisions upon reference under IBC may push lenders to refer such stressed cases to IBC. However, lenders may adopt a case specific approach for such references to IBC.
• Even though criterion for upgradation of stressed account has been relaxed, which now requires at least 10 percent of debt repayments from 20 percent earlier; the requirement of an investment grade ratings by external agency will ensure that upgradation is done only for viable cases.

Prashant Kumar, Chief Financial Officer, State Bank of India

• The RBI has not placed a bar on banks from taking stressed accounts to IBC but if there is scope for recovery, the new guidelines give a long rope for implementing a resolution plan.
• For banks, the focus will be on finding a resolution for stressed accounts rather than sending accounts to the NCLT for insolvency proceedings.

L Viswanathan, Partner, Cyril Amarchand Mangaldas

• Core of the Feb. 12 circular is still intact as the new circular.
• It requires 75 percent of creditors by value and 60 percent by number to consent to a resolution plan, which is higher than IBC which prescribes 66.6 per cent.
• It increases the period to implement a resolution from 180 to 365 days with dis-incentive of additional provisioning. It incentivises IBC references by permitting reversal of additional provisioning.

Sunil Mehta, Non-Executive Chairman, Punjab National Bank

• The circular is pragmatic as it takes into account most of the suggestions and recommendations that came during the course of the implementation of the Feb. 12 circular.
• RBI making the inter-creditor as mandatory would help make the resolution process simpler.
• Intent for the inter-creditor agreement draft wasn't to take advantage of smaller lenders, but to make it as equitable as possible.
• The 30-day grace period would provide banks time to formulate appropriate resolution plans.
• Banks need to be more watchful of the credit quality of the accounts.
• It's incumbent on banks to monitor and start taking corrective measures along with the borrower and promoter, well before the account reaches default stage.
• Indian banking system would get more aligned towards resolution mechanisms in 12 to 24 months.

R Gandhi, Former Deputy Governor, Reserve Bank Of India

• The new circular will not trigger more resolutions outside Insolvency and Bankruptcy Code framework.
• Initiation of the resolution process is mandated within 30 days of default. Hence banks cannot delay the resolution process or have the discretion to avoid the process.