The Reserve Bank of India (RBI) vide its notification bearing ref. no. DBR.No.BP.BC.101/21.04.048/2017-18 dated February 12, 2018 (Revised Framework) brought into effect a new framework with a view to early identification and resolution of stressed assets in harmonisation with the principles of Insolvency and Bankruptcy Code, 2016 (IBC).

Withdrawal of extant instructions

With the notification of this Revised Framework, all the extant instructions on resolution of stressed assets such as 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Scheme (SDR), Change in Ownership outside SDR, and Scheme for Sustainable Structuring of Stressed Assets (S4A) stand withdrawn with immediate effect. Accordingly, the Joint Lenders’ Forum as an institutional mechanism for resolution of stressed accounts also stands discontinued. All accounts, including such accounts where any of the schemes have been invoked but not yet implemented, shall be governed by the Revised Framework.

Some important definitions under the Revised Framework:

1. Default has been defined as non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid by the debtor or the corporate debtor, as the case may be.

   For revolving facilities like cash credit, default would also mean, without prejudice to the above, the outstanding balance remaining continuously in excess of the sanctioned limit or drawing power, whichever is lower, for more than 30 days.

2. Aggregate Exposure under the Revised Framework would include all fund based and non-fund based exposure with the lenders.

3. ‘Specified Period’ means the period from the date of implementation of RP up to the date by which at least 20 percent of the outstanding principal debt as per the RP and interest capitalisation sanctioned as part of the restructuring, if any, is repaid.

   Provided that the Specified Period cannot end before one year from the commencement of the first payment of interest or principal (whichever is later) on the credit facility with the longest period of moratorium under the terms of RP.

4. ‘Restructuring’ as an act in which a lender, for economic or legal reasons relating to the borrower’s financial difficulty (An illustrative non-exhaustive list of indicators of financial difficulty are given in the Appendix to Annex-I of the Revised Framework), grants concessions to the borrower. Restructuring would normally involve modification of terms of the advances/securities, which may include, among others, alteration of repayment period / repayable amount / the amount of instalments/rate of interest; rollover of credit facilities; sanction of additional credit facility; enhancement of existing credit limits; and, compromise settlements where time for payment of settlement amount exceeds three months.

 

1. Early identification of stress through stringent reporting requirements:

Lenders shall identify early stress immediately on Default by classifying stressed assets as special mention accounts as per the following categories:’

SMA sub-categories	Basis for classification – Principal or interest payment or any other amount wholly or partly overdue between
SMA-0	1-30 days
SMA-1	31-60 days
SMA – 2	61-90 days

Applicability:  All borrower entities having Aggregate Exposure  (i.e. including fund based and non-fund based) of Rs. 50.00 million and above.  

Reporting of Credit information –

• The lenders shall now report credit information, including classification of an SMA Accounts, to Central Repository of Information on Large Credits [CRILC] on monthly basis effective April 01, 2018.

Reporting of Default –

• For reporting of Default, the lenders shall now report to CRILC on a weekly basis, at the close of business on every Friday or the preceding working day if Friday happens to be a holiday.

2. Implementation of Resolution Plan (RP) :

The Revised Framework, in order to prevent defaults of borrower entities turn into non-performing assets has mandated the lenders to put in place Board-approved policies for resolution of stressed assets under this framework, including timelines of resolution.

The lenders are mandated to refer borrower entities for resolution under IBC if –

1. the RP could not be implemented as per the timelines, after the expiry of 15 days of such timelines; and
2. if the borrower entity defaults during the Specified Period of RP, within 15 days from the date of default.

Cross Default Rights –

Such a resolution can be proposed either singly or jointly by the lenders which mean that even in case of default of one single lender; other lenders can join such lender for resolution of the stressed asset.  This also substantiates cross default rights that are obtained by the lenders under their loan agreements.

The Revised Framework has described RP as any action/plans / reorganization including, any actions/plans/reorganization including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, the sale of the exposures to other entities/investors, change in ownership, or Restructuring.

Author’s Observations:

1. This Revised Framework aims to give a statutory recognition to Cross Default Rights which though being a standard norm in banking, its implementation was always a subjective matter and was available to the other Lenders, whether within or outside the Consortium, only to the extent of mutual agreement between the Borrower and the Lender. This is a very welcome step by RBI.
2. The RP does not include option of conversion of debt into equity which hitherto was available to the lenders under SDR and S4A. Does this mean under the Revised Framework, lenders will not be allowed to convert their debt into equity or the RBI does not envisage conversion of debt into equity as a viable option for Restructuring of stressed assets?
3. Implementation Conditions of RP:
   The Revised Framework has also implementation conditions of RP and such an RP shall be deemed to be implemented only if the following conditions are met –
   1. The Borrower is no longer in default with any of the lenders;
   2. In case of restructuring, all the documentation pertaining to restructuring including execution of necessary agreements, creation and perfection of securities are completed by all lenders.
   3. Finally, the new capital structure and/or changes in the terms of conditions of the existing loans get duly reflected in the books of all the lenders and the borrower.
4. Independent Credit Evaluation (ICE):
   RPs involving restructuring/change in ownership will require ICE of the residual debt as mentioned below –
   1. In case of ‘large’ accounts (i.e. accounts where aggregate exposure of lenders is Rs. 100.00 Crore and above), such ‘large’ accounts will require ICE of the residual debt by Credit Rating Agencies specifically authorised by RBI for this purpose.
   2. Accounts with aggregate exposure of Rs. 500.00 Crore and above will require two such ICEs.
   3. Only such RPs which receives a credit opinion of RP4 or better for the residual debt from one or two CRAs, as the case may be, shall be considered for implementation.

 

‘residual debt’ of the borrower entity, in this context, means the aggregate debt (fund based as well as non-fund based) envisaged to be held by all the lenders as per the proposed RP.

 

RP4 is the ICE symbol that has been separately defined under Annexure – 2 of the Revised Framework.

5. Default of Borrower Entities with Aggregate Exposure less than Rs. 100.00 Crore :

Clause D of the Revised Framework prescribes timelines for reference dates of borrower entities having Aggregate Exposure at Rs. 2000.00 Crore and above for implementation of RP. The reference date here shall mean March 1, 2018. The RP shall be implemented as per following timelines:

1. If in default as on the reference date, then 180 days from the reference date.
2. If in default after the reference date, then 180 days from the date of first such default.

The above timelines are applicable for accounts where resolution have been initiated under any of the existing schemes and also for those accounts where have been classified as restructured standard assets.

In respect of borrower entities with Aggregate Exposure of Rs. 100.00 Crore and above to less than Rs. 2000.00 Crore, RBI will announce reference dates for implementation of RP over a two year period.

Author’s Observations:

No Mechanism for accounts having Aggregate Exposure less than Rs. 100.00 Crore –

The Revised Framework does not explain how the lenders should deal with accounts having Aggregate Exposure less than Rs. 100.00 Crore nor does it specify any RP for borrower entities having Aggregate Exposure of less than Rs. 100.00 Crore. But that does not exclude stressed assets of less than Rs. 100.00 Crore from Revised Framework and this does not seem to be the intention of the drafters of the Revised Framework. Does this mean that the lenders have the liberty to resolve the stressed assets of less than Rs. 100.00 Crore on their own including write off, one-time settlement of such accounts or other recourse available to the lenders under extant laws?

Provisioning for Non-Performing Accounts (NPA)-

Through this Revised Framework, the lenders may have to increase their provisioning in respect of stressed accounts. But if one looks at the larger intent of this Revised Framework which, inter alia, is to arrest the slippage of a doubtful asset to an NPA, stopping evergreening of stressed Accounts and stringent reporting norms for default of Rs. 5.00 Crore or more, an RP will certainly help the lenders to take corrective actions in the event of a default.

Cleansing the Banking System in India –

The RP under this Revised Framework and the IBC, collectively, shows the intent of the Government and the RBI to clean the entire banking system in India by breaking the nexus of politicians-banks-businessmen and help the banking system to serve its ultimate objective i.e. to lend money for the benefit of the public at large.

The entire text of the Revised Framework can be viewed on the link given below –

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11218&Mode=0

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ABOUT THE AUTHOR

CS Nilesh Javker

CS Nilesh Javker is Assistant General Manager – Legal in the Legal Department of Welspun Group at its corporate office in Mumbai and working with Welspun Group since April 2010. He has interests in studying and research of various commercial laws such as Companies Act, 2013, Securities Laws, Insolvency and Bankruptcy Code, 2016, The Foreign Exchange Management Act, 1999, The Competition Act, 2002, The Arbitration and Conciliation Act, 1996. He has also worked extensively in company secretarial matters of both listed and unlisted companies, banking and finance documentation, contracts, tenders, agreements, civil litigations and corporate transactions such as mergers, demergers and acquisitions.