Defaults to be recognised in 30 days: RBI

Mumbai: The Reserve Bank Friday issued a new framework for resolution of bad loans, replacing the previous norms quashed by the Supreme Court in April, offering a 30-day gap for stress recognition instead of the one-day default earlier.

The new norms replaces all the earlier resolution plans such as the framework for revitalising distressed assets, corporate debt restructuring scheme, flexible structuring of existing long-term project loans, strategic debt restructuring scheme (SDR), change in ownership outside SDR, and scheme for sustainable structuring of stressed assets (S4A), and the joint lenders' forum with immediate effect.

The apex court had on April 2 struck down the stringent RBI circular, issued on February 12, 2018, for resolving bad loans under which a company could be labeled an NPA if it missed repayment for a day banks were asked to find a resolution within 180 days or else it should be sent to bankruptcy courts. The new circular provides for a framework for early recognition, reporting and time-bound resolution of bad loans.

The central banks said lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA).

Since default with any lender is a lagging indicator of financial stress faced by the borrower, it is expected that the lenders initiate the process of implementing a resolution plan (RP) even before a default.

The central bank said once a borrower is reported to be in default by any lenders, financial institutions, small finance banks or NBFCs, the lenders shall undertake a prima facie review of the borrower account within 30 days from the day of default.

During this review period of 30 days, lenders may decide on the resolution strategy, including the nature of the resolution plan (RP) and the approach for implementation of the RP.

"In cases where RP is to be implemented, all lenders shall enter into an inter-creditor agreement (ICA), during the review period, to provide for ground rules for finalisation and implementation of the RP in respect of borrowers with credit facilities from more than one lender," the new RBI circular said.

The lenders are free to initiate legal proceedings for insolvency or recovery, the central bank said.

The joint lenders' forum (JLF) as mandatory institutional mechanism for resolution of stressed accounts also stands discontinued, the RBI said. The RBI said the new directions will come into force with immediate effect.

The new norms are applicable to all borrowers with exposure of Rs 2,000 crore and above to banks, financial institutions like Nabard, Exim Bank, Sidbi,small finance banks and NBFCs, with immediate effect, the monetary authority said.

Legal experts hailed the new framework as it retains the core of the February 12 circular as it offers a mechanism that will enable resolutions through requisite majority.

"This framework builds on the February 12, 2018 circular and provides for a mechanism that will enable resolutions through requisite majority. The stipulation of an inter-creditor agreement will enable banks to collectively decide resolutions outside the IBC," L Viswanathan, a partner at law firm Cyril Amarchand Mangaldas said.

Another law firm Economic Laws Practice specialising in NCLT cases said the new norms address the fundamental reasons that led to the Supreme Court to strike down the February 12 circular.

"The new norms are uniform in as much as it applies to banks, financial institutions and NBFCs alike. Hopefully, NPA resolution will now pick up speed," its managing partner Suhail Nathani said.

The RBI said accounts with aggregate exposure above Rs 2,000 crore, resolution plan shall be implemented within 180 days from the end of the 30-day review period.

For borrowers with exposure between Rs 1,500 crore and Rs 2,000 crore, the new norms will be applicable from January 1, 2020, while for loans up to Rs 1,500 crore will be announced in due course.

"Lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA-0,SMA-1 and SMA-2),"RBI said.

Under the new norms, lenders shall have to report credit information, including classification of an account as SMA to the central repository of information on large credits on all borrowers having aggregate exposure of Rs 5 crore and above with them.

The central bank said since default with any lender is a lagging indicator of financial stress faced by a borrower, it is expected that the lenders initiate the process of implementing a resolution plan even before a default.

Resolution plans involving restructuring/change in ownership in respect of accounts where the aggregate exposure is Rs 100 crore and above, will require independent credit evaluation (ICEs) of the residual debt by RBI-authorised credit rating agencies.

Accounts with exposure of Rs 500 crore and above will require two ICEs implementation of such resolution plan, the RBI said, adding in case where a viable resolution plan is not implemented within the timelines, all lenders will have to make additional provisions 20 percent if a resolution is not implemented within 180 days from the end of review period.

An additional provision of 15 percent (total provisioning of 35 percent) will have to be made if no resolution is found within 365 days of the review period.

The RBI also warned that any action by lenders to conceal the actual status of accounts or evergreening the stressed accounts, will be subjected to stringent supervisory/enforcement actions as deemed, including, higher provisioning on such accounts and monetary penalties.

The central bank asked lenders to make disclosures in their financial statements, under 'notes on accounts', relating to resolutions plans implemented.

The new norms replaces all the earlier resolution plans such as the framework for revitalising distressed assets, corporate debt restructuring scheme, flexible structuring of existing long-term project loans, strategic debt restructuring scheme, change in ownership outside SDR, and scheme for sustainable structuring of stressed assets, and the joint lenders' forum with immediate effect.

The Supreme Court order came in on a petition filed by the central bank challenging the Allahabad High Court order which had asked it and the finance ministry to treat the power sector NPAs separately as their woes were mostly driven by external factors.

Power sector companies, which were affected the most by the circular, argued that their outstanding loans of Rs 5.65 lakh crore (as of March 2018) were a result of factors beyond their control such as unavailability of fuel and cancellation of coal blocks by the apex court/government and non-payment by state-run discoms.

GMR Energy, RattanIndia Power, Association of Power Producers, Independent Power Producers Association of India, Sugar Manufacturing Association from Tamil Nadu and a shipbuilding association from Gujarat had moved different courts against the circular.

The petitioners had challenged the circular arguing that applying a 180-day limit to all sectors of the economy without going into the special problems faced by each sector would treat "unequals equally" and would be arbitrary and discriminatory, and therefore, violative of Article 14 of the Constitution.

According to Icra, February 12 circular impacted loans worth Rs 3.8 lakh crore across 70 large borrowers of which Rs 2 lakh crore of 34 borrowers were in the power sector. Of this, 92 percent were classified as NPAs as of March 2018 and also made provisions of over 25-40 percent.