7-Jun-2019: Prudential Framework for Resolution of Stressed Assets

Introduction: In exercise of the powers conferred by the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934, the Reserve Bank, being satisfied that it is necessary and expedient in the public interest so to do, hereby, issues the directions hereinafter specified.

Short title and commencement:

1. These directions shall be called the Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019.

2. These directions shall come into force with immediate effect.

Applicability:

3. The provisions of these directions shall apply to the following entities:

1. Scheduled Commercial Banks (excluding Regional Rural Banks);
2. All India Term Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI);
3. Small Finance Banks; and,
4. Systemically Important Non-Deposit taking Non-Banking Financial Companies (NBFC-ND-SI) and Deposit taking Non-Banking Financial Companies (NBFC-D).

Purpose

4. These directions are issued with a view to providing a framework for early recognition, reporting and time bound resolution of stressed assets.

5. These directions are issued 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 initiation of insolvency proceedings against specific borrowers under the Insolvency and Bankruptcy Code, 2016 (IBC).

I. Framework for Resolution of Stressed Assets

A. Early identification and reporting of stress

6. Lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA) as per the following categories:

7. In the case of revolving credit facilities like cash credit, the SMA sub-categories will be as follows:

8. As provided in terms of the circular3 DBS.OSMOS. No.14703/33.01.001/2013-14 dated May 22, 2014 and subsequent amendments thereto, lenders shall report credit information, including classification of an account as SMA to Central Repository of Information on Large Credits (CRILC), on all borrowers having aggregate exposure4 of ₹ 50 million and above with them. The CRILC-Main Report shall be submitted on a monthly basis. In addition, the lenders shall submit a weekly report of instances of default by all borrowers (with aggregate exposure of ₹ 50 million and above) by close of business on every Friday, or the preceding working day if Friday happens to be a holiday.

B. Implementation of Resolution Plan

9. All lenders must put in place Board-approved policies for resolution of stressed assets, including the timelines for resolution. Since default with any lender is a lagging indicator of financial stress faced by the borrower, it is expected that the lenders initiate the process of implementing a resolution plan (RP) even before a default. In any case, once a borrower is reported to be in default by any of the lenders mentioned at 3(a), 3(b) and 3(c), lenders shall undertake a prima facie review of the borrower account within thirty days from such default (“Review Period”). During this Review Period of thirty days, lenders may decide on the resolution strategy, including the nature of the RP, the approach for implementation of the RP, etc. The lenders may also choose to initiate legal proceedings for insolvency or recovery.

10. In cases where RP is to be implemented, all lenders shall enter into an inter-creditor agreement (ICA), during the above-said Review Period, to provide for ground rules for finalisation and implementation of the RP in respect of borrowers with credit facilities from more than one lender.5 The ICA shall provide that any decision agreed by lenders representing 75 per cent by value of total outstanding credit facilities (fund based as well non-fund based) and 60 per cent of lenders by number shall be binding upon all the lenders. Additionally, the ICA may, inter alia, provide for rights and duties of majority lenders, duties and protection of rights of dissenting lenders, treatment of lenders with priority in cash flows/differential security interest, etc. In particular, the RPs shall provide for payment not less than the liquidation value6 due to the dissenting lenders.

11. 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:

1. The reference date, if in default as on the reference date; or
2. The date of first default after the reference date.

12. The reference dates for the above purpose shall be as under:

13. The RP may involve any action / plan / reorganization including, but not limited to, regularisation of the account by payment of all over dues by the borrower entity, sale of the exposures to other entities / investors, change in ownership and restructuring7. The RP shall be clearly documented by the lenders concerned (even if there is no change in any terms and conditions).

C. Implementation Conditions for RP:

14. RPs involving restructuring / change in ownership in respect of accounts where the aggregate exposure of lenders is ₹ 1 billion and above, shall require independent credit evaluation (ICE) of the residual debt8 by credit rating agencies (CRAs) specifically authorised by the Reserve Bank for this purpose. While accounts with aggregate exposure of ₹ 5 billion and above shall require two such ICEs, others shall require one ICE. Only such RPs which receive a credit opinion of RP49 or better for the residual debt from one or two CRAs, as the case may be, shall be considered for implementation. Further, ICEs shall be subject to the following:

1. The CRAs shall be directly engaged by the lenders and the payment of fee for such assignments shall be made by the lenders.
2. If lenders obtain ICE from more than the required number of CRAs, all such ICE opinions shall be RP4 or better for the RP to be considered for implementation.

15. A RP in respect of borrowers to whom the lenders continue to have credit exposure, shall be deemed to be ‘implemented’ only if the following conditions are met:

(a) A RP which does not involve restructuring/change in ownership shall be deemed to be implemented only if the borrower is not in default with any of the lenders as on 180th day from the end of the Review Period. Any subsequent default after the 180 day period shall be treated as a fresh default, triggering a fresh review.

(b) A RP which involves restructuring/change in ownership shall be deemed to be implemented only if all of the following conditions are met:

1. all related documentation, including execution of necessary agreements between lenders and borrower / creation of security charge / perfection of securities, are completed by the lenders concerned in consonance with the RP being implemented;
2. 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; and,
3. borrower is not in default with any of the lenders.

16. A RP which involves lenders exiting the exposure by assigning the exposures to third party or a RP involving recovery action shall be deemed to be implemented only if the exposure to the borrower is fully extinguished.

D. Delayed Implementation of Resolution Plan

17. Where a viable RP in respect of a borrower is not implemented within the timelines given below, all lenders shall make additional provisions as under:

18. The additional provisions shall be made over and above the higher of the following, subject to the total provisions held being capped at 100% of total outstanding:

1. The provisions already held; or,
2. The provisions required to be made as per the asset classification status of the borrower account.

19. The additional provisions shall be made by all the lenders with exposure to such borrower.

20. The additional provisions shall also be required to be made in cases where the lenders have initiated recovery proceedings, unless the recovery proceedings are fully completed.

21. The above additional provisions may be reversed as under:

(a) Where the RP involves only payment of overdues by the borrower – the additional provisions may be reversed only if the borrower is not in default for a period of 6 months from the date of clearing of the overdues with all the lenders;

(b) Where RP involves restructuring/change in ownership outside IBC – the additional provisions may be reversed upon implementation of the RP;

(c) Where resolution is pursued under IBC – half of the additional provisions made may be reversed on filing of insolvency application and the remaining additional provisions may be reversed upon admission of the borrower into the insolvency resolution process under IBC; or,

(d) Where assignment of debt/recovery proceedings are initiated – the additional provisions may be reversed upon completion of the assignment of debt/recovery.

E. Prudential Norms

22. The prudential norms applicable to any restructuring/change in ownership, whether under the IBC framework or outside the IBC, are contained in Annex-110.

II. Supervisory Review

23. Any action by lenders with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory / enforcement actions as deemed appropriate by the Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary penalties11.

III. Disclosures

24. Lenders shall make appropriate disclosures in their financial statements, under ‘Notes on Accounts’, relating to RPs implemented.

IV. Exceptions

25. Restructuring in respect of projects under implementation involving deferment of date of commencement of commercial operations (DCCO), shall continue to be covered under the guidelines contained at paragraph 4.2.15 of the Master Circular No. DBR.No.BP.BC.2/21.04.048/2015-16 dated July 1, 2015 on ‘Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’.

26. Section I(B), I(C) and I(D) of the framework shall not be applicable to revival and rehabilitation of MSMEs covered by the instructions contained in Circular No. FIDD.MSME & NFS.BC.No.21/ 06.02.31/ 2015-16 dated March 17, 2016, as amended from time to time. Section I(E) of the framework shall not be in derogation to the provisions of the circular DBR.No.BP.BC.18/21.04.048/ 2018-19 dated January 1, 2019.

27. Restructuring of loans in the event of a natural calamity, including asset classification and provisioning, shall continue to be guided as per the extant instructions.

28. The framework shall not be available for borrower entities in respect of which specific instructions have already been issued or are issued by the Reserve Bank to the banks for initiation of insolvency proceedings under the IBC. Lenders shall pursue such cases as per the specific instructions issued to them.

V. Withdrawal of extant instructions

29. 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 (JLF) as mandatory institutional mechanism for resolution of stressed accounts also stands discontinued.

30. The list of circulars/directions/guidelines that stand repealed is given in Annex - 3.

31. The lenders shall not reverse the provisions maintained as on April 2, 2019 in respect of any borrower unless the reversal is a consequence of an asset classification upgrade or recovery or resolution following the instructions of this circular. Any RP under consideration as on the date of this circular may be pursued by lenders under this revised framework subject to meeting the requirements/conditions specified in this framework.