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RBI revised framework offers some leeway to defaulters

One-day-default rule makes way for a 30-day one, but banks need to find a resolution fast or punitive provisions kick in
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RBI revised framework offers some leeway to defaulters

Lenders must enter into an inter-creditor agreement (ICA) to to work on the resolution and also set out the rights and duties of majority lenders, duties and protection of rights of dissenting lenders and other matters.

Even while retaining the right to direct banks to initiate insolvency proceedings against specific borrowers, the Reserve Bank of India (RBI) has eased the rules for classifying borrowers as defaulters. Promoters struggling to repay their loans now have 30 days before banks classify them as defaulters and the ‘one-day default’ rule has been done away with. However, banks need to act fast to find a resolution else they would have to make increasingly larger provisions.

The RBI on Friday issued a revised February 12 circular allowing banks 30 days before they recognise incipient stress in cash credit accounts. The circular had been declared “ultra vires” by the Allahabad High Court in April. In the 30 days post the default, banks would need to review the account and decide on a resolution strategy and may also choose to initiate legal proceedings for insolvency or recovery.

Thereafter the resolution plan must be implemented within 180 days and if that fails, lenders must provide an additional 20%. If a resolution is not in place after 365 days, lenders must provide another 15%. This is a departure from the earlier February 12, 2018 circular which directed banks to find a resolution plan within 180 days from date of default; if they failed, they were to refer the case to bankruptcy court. These provisions would need to be made in cases where lenders have initiated recovery proceedings but where the proceedings are not fully complete.

As an incentive to refer stressed accounts under the Insolvency and Bankruptcy Code, the RBI offered a carrot saying the additional provisions may be reversed under certain circumstances. “The rules increase period to implement a resolution from 180 to 365 days with the dis-incentive of additional provisioning though it incentivises IBC references by creditors by permitting reversal of additional provisioning,” L Viswanathan, partner, Cyril Amarchand Mangaldas, said.

The central bank lowered the threshold for decisions taken via an inter-creditor agreement (ICA), to be binding, to 75% by value (fund based and non-fund based) and 60% by number. This is higher than that specified in the IBC which prescribes 66%, but would help speed up cases and prevent some small lenders from stalling the process.
The regulator indicated that for accounts of Rs 2,000 crore and above, the ‘reference date’, Friday, June 7, marks the start of a 30-day review period following which banks have 180-days to implement a resolution plan. For stressed assets ranging between Rs 1,500 crore–Rs 2,000 crore, lenders would have a 30-day review period followed by a 180-day window to work on resolution starting January 1, 2020. The RBI indicated it would announce a date for cases below Rs 1,500 crore in due course.

Lenders must enter into an inter-creditor agreement (ICA) to to work on the resolution and also set out the rights and duties of majority lenders, duties and protection of rights of dissenting lenders and other matters. “In particular, the RPs shall provide for payment not less than the liquidation value due to the dissenting lenders,” the circular read.
The circular introduces the concepts of ‘ monitoring period’ under the condition for upgrade. The monitoring period spans from date of implementation of the resolution plan up to the date by which at least 10% of the sum of outstanding principal debt as per the plan and interest capitalisation sanctioned as part of the restructuring, if any, is repaid. A standard account classified as ‘non-performing asset’ or an NPA account retained in the same category on restructuring may be upgraded when all the outstanding loan/facilities in the account demonstrate ‘satisfactory performance’ during the monitoring period. However, any default within this period, further asset classification upgrade shall be subject to implementation of a fresh restructuring/change in ownership under the framework or under IBC, but also invite an additional provision of 15% at the end of the review Period.

The new directions,the central bank said, were “without prejudice to issuance of specific directions, from time to time by the Reserve Bank, to banks, in terms of the provisions of Section 35AA of the Banking Regulation Act, 1949, for initiating of insolvency proceedings against specific borrowers under the Insolvency and Bankruptcy Code, 2016(IBC).”

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