On the eve of Mahashivratri, a transformation came about in the form of RBI’s revised framework for resolution of stressed assets. With one stroke, RBI got rid of the CDR scheme, flexible restructuring of existing loans for long-term project loans, SDR, change of control outside of SDRs and S4A scheme and also the joint lenders forum, primarily with the view to remove any legacy of abuse and give banks a fresh thinking for the same. The circular now requires lenders to have processes that help in early identification of stress in borrowers by classifying them as Special Mention Account (SMA)0 (day 1) to SMA2 (end of day 90). The circular prescribes a detailed but non-exhaustive list that is fairly generic and wide enough to leave a lot of discretion to the lenders. Banks are required to report SMA accounts to the Central Repository of Information on Large Credits, the RBI repository for large credits where aggregate exposures are of 5 crore and above. This must be reported monthly effective from April 1, 2018. All defaults for exposures over Rs 5 crore need to be reported weekly effective from February 23, 2018, each Friday.
Lenders are required to put in place board-approved policies for resolution of stressed assets that are to be implemented as default happens. There is flexibility in devising a restructuring plan, as against SDR or S4A that imposed conditions related to sustainable debt and lenders taking equity. However, a plan is deemed complete only when all related documentation is done and the new capital structure is reflected in the books of the lenders and the borrowers. Exposures over Rs 1,000 crore would require a credit rating from one agency, and those above Rs 5,000 crore would require two credit rating agencies to assess the resolution plans. While the circular defines ratings from RP1 to RP7, a minimum rating of RP4 (moderate degree of safety on financial obligations) is required for every successful restructuring.
The detailed timelines for smaller accounts are yet to be finalised; for aggregate exposures of Rs 2,000 crore and more, the following timeline has been set:
* The reference date is March 1, 2018, or date of first default, whichever is later.
* There needs to be an approved, rated and implemented plan within 180 days from date of default; else, the account needs to be referred to the corporate insolvency resolution process under the Insolvency and Bankruptcy Code (IBC).
* Should the plan be accepted, such account should not have any default during the specified period. Such specified period is up to the date by which at least 20% of the outstanding principal debt plus interest capitalised as per the resolution plan are paid. But this period cannot be less than one year.
* If there is a default during the above ‘specified period’, the account is taken to IBC.
* Accounts over Rs 1,000 crore can be upgraded after the specified period should the company get a BBB+ investment grading from a credit rating agency, and exposures over Rs 5,000 crore would need such a rating by at least two rating agencies.
* Additional finance given as part of a resolution plan will not be considered as being of NPA grade during the ‘specified period’ and would be treated as standard.
All provisioning norms remain the same during the specified period. For change in ownership, banks can upgrade accounts immediately, provided the new owners are not disqualified under Section 29A of IBC; 26% of the shareholding is transferred to a new owner and the new owner is the largest shareholder and is in ‘Control’, as defined under the Companies Act, 2013, Sebi regulations or all other applicable statutes.
RBI seems to have learned from its earlier schemes. It has got rid of the rigidities around imposing shareholding and, subsequently, dilution on bankers within 180 days, forced equity issuance and the condition of 50% sustainable debts on current earnings as in S4A schemes and the need for investment rating on turnaround plans by December 31 before availing of the IBC provisions. RBI has now given full flexibility on restructuring to lenders based on each situation, provided the discipline around ratings is maintained for admissibility and upgrade. On ratings too, RBI has softened the stand it took in December 2017—on investment grade ratings ab initio—and allowed a lower rating on the initiation of a plan and an investment-grade rating for provisioning upgrade.
Further, there are now consequences prescribed for not taking a decision within 180 days in the form of IBC; this may act as an effective ‘stick’ for bankers for collective decision-making and for promoters to ensure success to avoid losing their businesses in IBC. Further, now lenders and borrowers won’t be able to defer provisioning by implementing a plan without having credible resolution strategies and outcomes in place.
However, implementation challenges are key. Bankers who have refrained from taking decisions are expected to give a 100% approval for a resolution plan; else, default could result in the asset coming under the IBC process. We may see consolidation of holdings by larger banks who may buy exposures of smaller banks at values that enable compelling and acceptable resolution plans. Bankers would need to get oriented to think on resolution with appropriate strategies to manage companies better during the ‘specified period’ to have better results. Participation of ARCs, distressed assets funds and private equity should be encouraged for full or part business sales as also in resolution plans.
All in all, this is a good step in line with global stress resolution practices with lots of sticks and carrots, which are yet to be sowed. Bankers would do well to go by the spirit and resolve individual cases on the merit they deserve, given that the government has armed them with capital, which if used prudently, would help achieve all objectives.