The Reserve Bank of India, on Friday, released a revised circular on restructuring of stressed accounts, after the last such circular was struck down by the Supreme Court.
The new rules ease significant provisions related to the timeline that needs to be followed for resolution of stressed assets. It also replaces the diktat to refer large stressed accounts for insolvency after 180 days — something that the Supreme Court had objected to — with increased provisions against accounts that are not resolved within a stipulated time period. Instead, it offers an incentive to banks to take the route of the Insolvency and Bankruptcy Code by allowing for lower provisions against accounts referred for insolvency.
The revised rules are applicable to scheduled commercial banks, systemically important non-deposit taking non bank financial services companies and deposit-taking NBFCs, small finance banks and all-India financial institutions. The earlier set of rules applied only to banks and all-India financial institutions.
From One-Day To 30-Day
As part of the new guidelines, the regulator has said that banks will be allowed a 30 day “review period” from the date of default of a corporate account with outstanding dues of over Rs 2,000 crore. During the review period, lenders are expected to review the status of the account and decide on a strategy for restructuring an account. Lenders may also choose to initiate insolvency proceedings against the account during this period.
This is a step away from the guidelines that the RBI had released in February 2018, where it had said that the lenders must start action against a corporate account immediately after the default.
In the case of cash credit accounts, an account would be considered as stressed and classified as a ‘special mention account’ only if it is overdue for more than 30-days. In the case of term loans, the classification as ‘special mention account’ happens starting immediately after a delay in payments of dues.
180-Day Deadline
Once the review period is completed, lenders have a 180-day period to implement a resolution plan for the company, which could either involve a restructuring of existing debt, change in management, sale of assets or repayment of the outstanding dues by the borrower.
In essence, this means that banks now have 210 days from the first day of default (including the 30-day period of review) to come up with a resolution plan.
If banks are unable to implement a resolution plan within 180 days, they would be subjected to accelerated provisioning.
Banks are expected to make additional provisioning of 20 percent, over and above the provisions they hold, if the plan is not implemented within 180 days. If the plan is not implemented within 365 days, the additional provisions will be raised to 35 percent.
IBC vs Non-IBC
The Feb.12 circular had asked that all accounts not resolved within 180 days be referred for insolvency. The Supreme Court struck this down.
According to the new rules, banks can write back provisions quicker if an account is referred under the IBC.
Where resolution is pursued under IBC, half of the additional provisions made may be reversed on filing of insolvency application. The remaining additional provisions may be reversed upon admission of the borrower into the insolvency resolution process under IBC.
Where a resolution plan involves restructuring/change in ownership outside IBC, the additional provisions may be reversed upon implementation of the resolution plan.
The RBI, in its press release, added that it will issue directions to banks to initiate insolvency proceedings if needed.
“Notwithstanding anything contained in this framework, wherever necessary, RBI will issue directions to banks for initiation of insolvency proceedings against borrowers for specific defaults so that the momentum towards effective resolution remains uncompromised,” the RBI said.
Approval of Resolution Plan
To implement a resolution plan, the regulator has said that the lenders must sign an inter creditor agreement, before the review period of 30 days end.
Under the agreement, a plan that receives the approval of 75 percent of the lenders by value and 60 percent of the lenders by number would be applicable on all.
In the original version of the Feb.12 circular, 100 percent approval was needed from creditors before a resolution plan was implemented.
Change Of Ownership
As per the new rules, if a company undergoes a change in ownership as part of the resolution plan implemented under IBC or otherwise, the account can be upgraded to a ‘standard account’.
If a change of ownership takes place outside the IBC, the RBI has asked banks to take extra precautions.
Banks must ensure that the new promoter’ is not be a person /entity /subsidiary /associate of the existing promoter/promoter group. The new promoter should have acquired at least 26 percent of the paid-up equity capital of the firm and be in ‘control’.
With these pre-conditions in place, an account can be upgraded should it display satisfactory performance during a specified ‘monitoring’ period.
Upgradation Of An Account
The RBI has also tweaked rules for upgrading an account to standard asset after it has been restructured.
An account can be upgraded when all the outstanding loan facilities demonstrate ‘satisfactory performance’ till at least 10 percent of the outstanding loans are repaid. Earlier, banks could only upgrade an account after 20 percent of the outstanding loans were repaid.
Expanding The Pool
While at present, the rules apply to accounts with dues of more than Rs 2000 crore, the RBI intends to expand the pool.
Starting Jan.1, 2020, the stressed assets rules will apply to all accounts of more than Rs 1500 crore. Eventually, the RBI intends to extend the same rules to account of less than Rs 1500 crore but is yet to specify a date for this.
Reporting & Supervision
The RBI has asked lenders to make appropriate disclosures in their financial statements, under ‘Notes on Accounts’, relating to resolution plans implemented.
It has also warned banks that any action to conceal actual status of account to be subjected to stringent supervisory / enforcement actions.
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