Resolution of stressed assets- Analysis of latest RBI circular

Key provisions of latest RBI Circular No. RBI/2018-19/203 DBR.No.BP.BC.45/21.04.048/2018-19 dated June 07, 2019 in relation to Resolution of stressed assets.

1. Identification and reporting of stress

• Lenders shall recognize incipient stress in loan accounts
• classifying such assets as special mention accounts (SMA) as following:

• Lenders shall report credit information to CRILC, on all borrowers having aggregate exposure of Rs. 50 million and above with them on monthly basis.

2. Implementation of Resolution Plan

• lenders initiate the process of implementing a resolution plan (RP) by placing Board approved policies for resolution along with the timelines
• Once a borrower is reported to be in default, lenders shall undertake a prima facie review of the borrower within 30 days from default (“Review Period”). During this Period, lenders may decide resolution strategy, including nature of RP, approach for implementation of RP, initiation on legal proceedings for insolvency or recovery.
• In case RP to be implemented-> All lenders shall enter into Inter Creditor Agreement ->which shall state (i) Rules for finalization and Implementation of RP

(ii) Rights and duties of lenders

(iii) Duties & protection of dissenting Shareholders

(iv) Priority of lenders in cash flows

• The RPs shall provide for payments not less than liquidation value due to the dissenting lenders
• In respect of accounts with aggregate exposure above a threshold with the lenders, as indicated below, on or after the ‘reference date’, RP shall be implemented within 180 days from the end of Review Period. The Review Period shall commence not later than:

(a) The reference date, if in default as on the reference date; or

(b) The date of first default after the reference date.

• Applicability of guidelines is linked with a reference date depending upon the exposure of default account (table below)

• If an account is in default on or after the above mentioned reference date and exceeds the above threshold, RP shall be implemented within 180 days from end of Review Period. The Review Period shall commence not later than:
• The reference date, if in default as on the reference date; or
• The date of first default after the reference date.
• RP may include regularization, sale of exposure to other investor, change of ownership, restructuring etc. (restructuring means when lenders grants some concession to the borrower due to reasons relating to borrower’s financial difficulties)

3. Implementation conditions

• Where RP involves Restructuring / change of ownership then lenders shall have to get an Independent credit Evaluation(ICE) by a specified Credit rating agency as per below limit:
• If default account exposure >= Rs. 1 billion, then 1 ICE is required.
• If default account exposure >= Rs. 5 billion, then 2 ICE is required.

Credit opinion of all CRAs should be RP4 or above only then RP shall be considered for implementation. (Engagement and Payment of CRA shall be handled by Lenders)

Other conditions: The documentation should be complete including creation and perfection of security and Borrower is not in default with any other lender

4. Delay in implementation of RP

• Additional provision requirement

• Additional provision shall be made over and above existing provision and subject to maximum of 100% of total outstanding. Azdd. Prov. shall be made by all lenders with exposure in client.
• Prov. shall also be made in case recovery proceeding initiated by the lenders

Reversal of add. Provision

• If RP involves only payment of Overdue amountà prov. may be reversed if borrower is not in default for a period of 6 months after clearing of overdue
• If RP involves restructuring/ownership changeà prov. may be reversed upon implementation of RP
• If resolution under IBCà Half of add. prov. may be reversed on filling of application and half may be reversed after admission under IBC

Borrower

1. Scheduled Commercial Banks (excluding Regional Rural Banks);

2. All India Term Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI);

3. Small Finance Banks

4. Systemically Important Non-Deposit taking Non-Banking Financial Companies (NBFC-ND-SI) and Deposit taking Non-Banking Financial Companies (NBFC-D)