Lenders can now review a borrower account within 30 days of default. Earlier, the banks had to start resolution within one day of default.
Illustration: Dominic Xavier/Rediff.com.
The Reserve Bank of India has dropped the one-day default rule and given a 30-day breather to lenders for review of the borrower account.
According to the revised norms on stressed assets issued by the RBI on Friday, lenders can review a borrower account within 30 days of default. Earlier, the banks had to start resolution within one day of default.
The chief financial officer of an engineering, procurement and construction company said the one-day default rule was a huge headache for companies, as it would trigger a rating downgrade, which, in turn, would impact borrowing cost and the image of the company. “From one day to a 30-day window is significant.”
On February 12, 2018, the RBI had issued a circular under which banks were asked to initiate resolution or restructuring of loans of Rs 2,000 crore or more if there was a single day of default. The Supreme Court had, however, struck down the circular, terming it “ultra vires”.
According to the circular, if a resolution was not worked out within 180 days, banks were asked to initiate insolvency.
According to the latest norms, if a resolution plan is not implemented within 180 days, then banks will have to make an additional 20 per cent provisioning and if it doesn’t happen in 365 days, they will provide for an additional 15 per cent.
“This is a relief for existing promoters as the sword of the Insolvency and Bankruptcy Code (IBC) would not be hanging over their heads in the immediate term,” the EPC executive said.
Also, the resolution plan will have to be approved by 75 per cent of the creditors by value as opposed to 100 per cent earlier.
But the chief executive of a telecom company pointed out that in cases where the resolution plan is to be implemented, all lenders would have to enter an inter-creditor agreement (ICA) during the review period to provide for ground rules for finalisation and implementation of the plan in respect of borrowers with credit facilities from more than one lender. The 75 per cent threshold would therefore become futile.
According to the revised framework, the ICA would provide that any decision agreed by lenders representing 75 per cent by value of total outstanding credit facilities and 60 per cent of lenders by number would be binding on lenders.
A steel company CEO, however, pointed out that there were no specific guidelines in the revised norms for the resolution plan, unlike the corporate debt restructuring scheme. Also, getting two positive rating for the resolution plan was a hurdle.
But Icra Vice-President Abhishek Dafria said complete freedom was provided on the framework for resolution plan. He also said the prudential framework would de-clog the National Company Law Tribunal and in a way help clear the IBC cases.
L Viswanathan, partner, Cyril Amarchand Mangaldas said the core of February 12 circular remains intact. The stipulated requirement of creditors consent for a resolution plan as 75 per cent by value and 60 per cent by number, which is higher than IBC which prescribes 66 per cent or two-thirds.
“This increased period to implement a resolution from 180 to 365 days with dis-incentive of additional provisioning though it incentivises IBC references by creditors by permitting reversal of additional provisioning. Intercreditor Agreement mandatory amongst banks, financial institutions NBFCs and ARCs, which also contemplates protection for dissenting creditors,” he said.
Bankers believe new stressed asset norms will aid resolution
The revised framework has rules for seeking approval from lenders (75 per cent by value and 60 per cent by number) for resolution plans as against 100 per cent earlier.
The revised framework for the resolution of stressed assets will help lenders to prepare workable plans for companies and enhance prospects of recovery, bankers said.
Rajkiran Rai G, managing director and chief executive, Union Bank of India, said the incorporation of the Inter-Creditor Agreement (ICA) in rules would help align many lenders in resolution activity.
The revised framework has rules for seeking approval from lenders (75 per cent by value and 60 per cent by number) for resolution plans. This is a realistic provision, he added. The February 12 circular sought 100 per cent agreement among lenders on a resolution plan.
V G Kannan, chief executive, Indian Banks’ Association, said there were incentives for staying the course to implement resolution plans in 180 days and disincentives for breaching timelines.
Also, the RBI has relaxed the threshold condition for upgrading an account under a resolution plan. Now, lenders can decide on upgrading if 10 per cent of outstanding principal debt is paid during the resolution period. In the earlier circular, the RBI had kept threshold of 20 per cent for repayment, Kannan said.
A senior State Bank of India executive said the 10 per cent threshold was a realistic level because many units under resolution were working at low operating levels. The 10 per cent level will increase prospects of an effective rollout of resolution plans and recoveries.
Sapan Gupta, National Practice head, banking and finance, Shardul Amarchand Mangaldas, said the RBI circular was a mixed bag. On the positive side, provisioning will be frozen when the resolution plan under the Insolvency and Bankruptcy Code (IBC) is pending with the National Company Law Tribunal, hence banks won’t be penalised for court delays. It will also give a boost to the interim finance market as that would be treated as a standard asset.
Pointing to likely challenges, he said the provisions on signing inter creditors agreement within 30 days of default would be difficult.
Also, additional provisioning is not a strong deterrent for delayed implementation. So the resolutions may get delayed.
Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, said delay in resolutions would be major challenge for public sector banks. Delay could mean a low level of recoveries, leading to higher capital requirements, which the government as their owner may have to make good.
Abhijit Lele in Mumbai
Individual insolvency finally on govt’s agenda
Once the new rules kick in, for the first time in India, debtors and operational creditors will be able to trigger insolvency once the individual insolvency code is notified.
The government is fine-tuning the draft rules for individual insolvency and is likely to introduce three categories of debt resolution based on the loan amount, a senior official told Business Standard. The focus, the official added, would be on resolution through mediation in most cases.
“The current draft (for individuals) imitates the corporate insolvency procedures, which seems a bit disproportionate to the defaulter. We need to correct that,” the official said.
The entry-level debt of up to Rs 35,000 will not have to go through any adjudication process, with the ministry of corporate affairs (MCA) planning to put an online mechanism under “fresh start” for resolving such loans.
The MCA is mulling two more slabs -- Rs 35,000-10 lakh and above Rs 10 lakh -- which will have the option of both compulsory and voluntary mediation, failing which the matter will be referred to the Debt Recovery Tribunal (DRT).
For the first time in India, debtors and operational creditors will be able to trigger insolvency once the individual insolvency code is notified.
Those with debt up to Rs 35,000 and having no asset or income are likely to get a waiver. The move will affect a large chunk of the unorganised sector, small borrowers and entrepreneurs.
“Law as it stands today is a bit too cumbersome. We have identified changes that need to be made. The current law will require significant tweaking,” the official quoted above said.
According to the current mechanism, while corporate debtors approach the National Company Law Tribunal (NCLT) for bankruptcy and insolvency resolution, individual insolvency cases are referred to DRTs. Over 100,000 cases are pending in DRTs.
“The existing system is out of date. The new rules will help banks better assess the credit risk. The major challenge will be to make the process easy and cost-effective,” an industry expert, who did not wish to be named, said.
The government is hoping that a majority of individual cases get resolved in the pre-litigation stage through conciliation and mediation. DRTs too have been asked not to put the individual insolvency cases in the queue.
“As companies are undergoing the insolvency process, promoters are also getting insolvent. Both these processes have to be undertaken simultaneously,” said Manoj Kumar, partner, Corporate Professionals.
The policy will be implemented in phases. The focus in the first phase is likely to be on individuals who are guarantors to corporates undergoing the resolution process, according to officials.
The Insolvency and Bankruptcy Board of India has formed a working group to recommend the strategy and approach for the implementation of provisions relating to insolvency and bankruptcy of individuals and partnership firms, under Part III of the Insolvency and Bankruptcy Code, 2016.
In the offing
Individual insolvency rules to be notified soon, to be implemented in phases
- 'Fresh start' for debt up to Rs 35,000
- Online and non-adjudicative process
- No asset, no income debtors to get a loan waiver
Higher debt of Rs 10 lakh and above
- Option of compulsory and voluntary mediation
- Govt to encourage conciliation over litigation
- Debt recovery tribunals the final resort
Ruchika Chitravanshi in New Delhi