FAQs on RBI's New circular on the framework for stressed assets

The RBI on Friday issued a revised circular for lenders to deal with stressed loans, over two months after the previous framework was quashed by the Supreme Court.The new rules are applicable to commercial banks, small finance banks, and systematically important and deposit-taking non-banking financial companies.

Following are frequently asked questions on the revised circular:

Q: What happens once there is a default?
A: Once a borrower is in default to any of the lenders, all lenders to it will have to undertake a review within 30 days. 

Q: How will all banks get to know of a default with one or more of them?
A: RBI has created a database called Central Repository of Information on Large Credits. The database, accessible by all banks, includes classification of loans where exposure of banking sector is 50 mln rupees and above. Lenders are mandated to make disclosure of defaults on every Friday.

 Q: What are banks expected to do in the review period?
A: Banks will assess the reason for the default and take remedial measures in the 30-day review period. The borrower could have defaulted on repayment because of cash flow mismatches caused by factors beyond its control or it could have defaulted willfully. After assessment, banks will discuss ways to recover their money. In the review period, banks can also opt to take the legal route such as initiating proceedings under the Insolvency and Bankruptcy Code. If they don't opt for the IBC route, banks will have to start preparing a resolution plan. Before that, all lenders will have to sign an inter-creditor agreement in the review period. The lead bank, with the highest exposure in the consortium, is expected to undertake the coordination work related to the resolution process.

Q: What is an inter-creditor agreement?
A: It is an agreement that sets the grounds for finalizing and implementing a resolution plan. It also spells out details such as the rights of majority lenders, dissenting lenders, and treatment of lenders with priority in cash flows, among others. Any decision taken by lenders representing 75% by value of total outstanding credit facilities and 60% by number will be binding on all the lenders that have signed the inter-credit agreement.

Q: What is the time period for implementing the resolution plan?
A: Resolution plan has to be implemented within 180 days of the end of review period--effectively, within 210 days of the default. However, the plan will be deemed implemented if it is not in default with any of the lenders as on 180th day.

Q: What happens if the lenders don't meet the deadline for implementing the resolution plan?
A: Banks will have to make higher provisions, over and above the regulatory requirement, if they don't meet the deadline. RBI rules mandate lenders to keep aside funds in the form of provisions to cover losses from bad loans. Once the borrower makes good on the payment, banks can reverse these provisions. As per current rules, once an account is tagged as NPA, banks have to keep aside 15% of the outstanding amount as provisions for the first year. This progressively increases and reaches 100% if the account remains NPA for over three years. Under this circular, if banks are unable to meet the 180-day deadline, they will have make 20% additional provision. If the plan is not implemented within a year's time, lenders have to make 15% more provisions.

Q: What happens to the additional provision once the plan is implemented?
A: Banks are allowed to reverse the additional provision once the resolution plan is implemented. In case the plan involves payment of dues by the borrower, the additional provisions may be reversed provided there is no default for six months in payment of dues. If lenders decide to take the insolvency route for resolution, they can reverse half of the additional provisions on filing of insolvency application and the remaining half once the case is admitted.

Q: What happens after the resolution plan is implemented?
A: On implementation of the plan, the account can be upgraded to the 'standard' (non-default) category provided it is not in default during the monitoring period and the credit facilities to the borrower are rated investment grade, BBB- and above. Monitoring period starts with the date of implementation of resolution plan and ends when at least 10% of the sum of outstanding principal debt is repaid.
Provisions held on restructured assets, as part of the resolution plan, can be reversed when the accounts are upgraded to standard category. If there is a default during the monitoring period, the lenders will have to implement a fresh restructuring or change in the ownership of the defaulting company as per this circular or under IBC. They will also have to make additional provisioning of 15% within 30 days.

Q: What is the impact of the revised circular?
A: To a large extent, recognition of big stressed loans in the banking system is done. Lenders are already pursuing recovery efforts through various routes including IBC. Since Friday, the 30-day review period has started for accounts where aggregate exposure is above 20 bln rupees. Barring the power sector, most accounts of this size are already under the resolution process and hence an immediate impact on provisioning is unlikely. Lenders are also taking comfort from the higher provisions they have made and expected loan recoveries from resolution of big-ticket accounts under IBC in the near-term. 

Source : RBI website, RBI circulars



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