The Reserve Bank of India’s revised circular on restructuring of stressed accounts would help bankers and borrowers to come to resolution at the earliest, according to VG Kannan, chief executive officer at Indian Banks’ Association.
This is a much-awaited circular, Kannan told BloombergQuint in an interview. Most of the “asks” by banks have been agreed, he said. “We have been waiting for quite some time after the Supreme Court had quashed the earlier circular on technical grounds and it has also provided a lot of clarity to certain issues which we had raised,” Kannan said. “We are overall satisfied.”
The revised rules ease significant provisions related to the timeline that needs to be followed for the resolution of stressed assets. It replaces the diktat to refer large stressed accounts for insolvency after 180 days with increased provisions against accounts that are not resolved within a stipulated time period.
The Supreme Court in April had struck down the RBI’s Feb. 12 circular on defaulting companies, calling it illegal. The circular had attempted to lay down a rule-based stressed asset framework which asked banks to resolve stress in large accounts within 180 days or refer them for insolvency proceedings. The apex court struck down the circular on grounds that the law permits the regulator to give directions to banks on stressed assets only upon the central government’s authorisation and in case of a specific default.
Watch the full interview here:
Here are the edited excerpts of the interview:
Your broad overview on the changes that have come in?
This is a much-awaited circular. We have been waiting for quite some time after the Supreme Court had quashed the earlier circular on technical grounds and it has also provided a lot of clarity to certain issues which we had raised. Overall, we got a lot of relief as compared to the earlier one. For example, now you can have a review period of 30 days before one can start the resolution plan to be approved compared to one day earlier.
Lot of incentives and disincentives for an early completion of the resolution period. Disincentive in case if there’s a delay and incentive to complete it so that the additional provisions can be reversed. There are certain other issues like the non-banking financial companies were not covered under the earlier circular, that is also been included. Besides, the monitoring period that 20 percent of the loans had to be repaid before the account could be upgraded has been reduced to 10 percent.
Overall, I think many of the asks of the banks have been agreed. We are overall satisfied to a large extent. New circular gives a lot of relief to the bankers and borrowers to come to the resolution at the earliest.
The 30-day additional grace period that is given, there is a fear that there will be a laxity that can come into place with more time?
Technically speaking, the circular also provides that if there’s a delinquency or a feeling that the company will default in future, you can start the resolution process. There’s no bar to start the discussion on a resolution before the actual default takes place. So that is already available.
They have also provided clarity on financial difficulties and asking each of the banks to prepare a policy as to how to define the defaults and take a call on resolution process. That has also been provided for in this system.
Is the definition of financial difficulty clear enough? Is it very different from how it was working so far?
Earlier they just gave a very generic definition for financial difficulty, whereas they had given three to four clauses where there is a financial difficulty. Using those four clauses, boards can have a resolution. Certain signs can be actually put in the particular policy to indicate there is a delinquency and financial difficulty.
This would be at a board level for all the companies or perhaps for sector specific conditions?
All banks. Banks will decide what is to be done and they will prepare a policy for this.
How harsh to your mind is an incremental 20 percent provision after 180 days and 35 percent after 365 days? Is it harsh particularly in the current context for public sector banks?
It could be harsh, but it was worse in the earlier circular where you had to necessarily go to the Insolvency and Bankruptcy Code after 180 days. For various reasons, resolution process need not necessarily be completed in 180 days. Even if its 365 days or 400 days, the additional disincentive for them to make provisions will be the incentive to have quicker resolution and sort of reverse the provisioning.
The incentive you think on IBC is strong enough? Do you think banks still have enough reason to go to the IBC with accounts?
Not mainly because of capital they will go to the IBC. They will probably give a chance to the borrower. The idea is to have a resolution process in place and that would be the first incentive. But for some reason if they are not in the position to have a proper resolution in place, I think it also incentivises them to go to the IBC and get the provision reversed at the earliest.
All of this had started because of the power companies, who had opposed the Feb. 12 circular and then various other people joined in. What changes say stressed power accounts would have under this circular versus the Feb. 12 circular?
In the case of power, the issues are beyond the control of bankers. The issues are totally structural and that is something that would not make any difference, even if a one or two-year relief is given. Therefore, banks would be asked to make additional provisions in case they don’t refer it to the IBC. They will also have to make the ageing provision. For example, if the company has already been a non-performing asset for one year, they have to make a 25 percent provision and then over and above the 25 percent, they will have to make a 20 percent and then another 15 percent — almost 60 percent provision will have to be made. If they go to the IBC, then they can get it resolved. I don’t think the circular has got any provisions for any sector identified, to be given any release.
Those 180 days for power companies would start from the date of the circular?
From today.
Is the approval of resolution plan by 75 percent of the creditors by value fair? It’s better than 100 percent, but lower than what is needed by the IBC.
I think 60 percent to 75 percent is a reasonable number to expect them to come on board. The RBI also mentions an agreement to be signed between lender and the particular borrower so that the resolution takes place quickly. They will then probably meet, look at the resolution plan, get it approved by 75 percent, which becomes binding on the others. They have also made provisions for those dissenting people to be paid, what is called the liquidation value.
You mentioned about the upgradation of the accounts — so now after a resolution plan is in place, you can upgrade the account if 10 percent of the facilities are paid back. Have I understood that right?
Yes, 10 percent of the facility, subject to repayment of the first installment of the loan with the longest moratorium.
Is that a big relief?
Yes, 20 percent to 10 percent is a big relief.
They have expanded this to NBFCs. Is this in the context of the current trouble that NBFCs are facing?
No, this was also one of our asks. In many projects, NBFCs had taken 10-15 percent stakes, and they weren’t enabled under the circular. This revised circular enables them to come to a resolution.
Should we expect banks to ease up a little on their clients, because the RBI has eased up on them? Or will we see the slightly stringent credit culture, which had seeped in over the last few years continue?
The credit culture which had become a bit more cautious will continue for some time, till new projects come up. The only relief is that the new circular will help bankers and the borrowers work together for a proper resolution. The earlier circular also provided full freedom for the bankers to arrive at a resolution in the first 180 days, but the fear was of a possible default subsequently, which could get the account directed to the IBC. The new review period will give another opportunity to find a solution, of course, additional provisions have to be made.
We shouldn’t fear that the banks will stay away from the IBC process? We do know that earlier the IBC process created a lot of delays for banks.
The earlier experience with the IBC has been mixed. In a few cases, we got some resolutions, where things had been going on and on. We also had change of promoters in a few cases, which is not something you generally see in India outside the IBC process. Maybe the existing promoters will work with the bankers to find a resolution outside the IBC framework, which will ensure that they will remain in control, but not in full control, but they will still be in a position to work out a resolution process successfully.
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