The Reserve Bank of India (RBI) issued a revised framework for resolution of stressed assets after the Supreme Court struck down its 12 February 2018 circular. The Framework for Resolution of Stressed Accounts (FRESA) provides greater discretion to lenders to decide the resolution plan (RP), which may involve restructuring, sale of exposures and change of management or ownership of the borrower. The new framework covers scheduled commercial banks (SCB), all India financial institutions (AIFI), small finance banks (SFB), and systemically important non-banking finance companies (NBFC).
Special mention accounts (SMAs): The defaulting accounts will be categorized as SMA-0 if the default is between 1-30 days, SMA-1 if the default is between 31-60 days, and SMA-2 if the default is between 61-90 days.
Timelines: A review period of 30 days and a resolution period of 180 days are the two components of the resolution timelines.
The review period starts immediately in the case of borrowers with aggregate exposure of ₹20 billion (US$288 million) and above. In the case of borrowers with aggregate exposure between ₹1.5 billion and ₹20 billion, the review period starts from 1 January 2020. There is no defined timeline as of now for borrowers with aggregate exposure of less than ₹1.5 billion, leaving all small and medium-sized borrowers out of the scope of FRESA. During the review period, the lenders are presumed to have agreed on the RP. The RP has six months for implementation, but it is not a strict deadline. If the deadline has not been met, lenders have to make an additional 20% provision for up to one year from the end of the review period, and 35% provision for the period beyond one year.
Only binding on NBFCs
Though the FRESA is applicable to SCBs, AIFIs, SFBs and NBFCs, the borrower must be reported as being in default by either an SCB, AIFI or SFB for the framework to be triggered. Similarly, only the credit exposures of the SCBs, AIFIs and SFBs are required to be considered for determining the reference date for implementation. The directions have been made applicable to NBFCs only to bind them to the proceedings under the FRESA in case of borrowers that have multiple lenders.
Mechanism under FRESA
Once an account becomes a defaulter, the lenders will review the account within a period of 30 days and prepare an RP. The lenders can either resolve the stressed asset under the FRESA or take legal action for resolution and recovery. If they decide to resolve the stress, they have to sign an inter-creditor agreement, which must be implemented within 180 days from the approval of the RP. The pre-requisites of implementing an RP are:
- Approval of 75% of lenders by value and 60% of lenders by number.
- The RPs must be independently rated. In cases where the aggregate exposure is ₹1 billion and above, at least one credit rating agency (CRA) should rate it and where it is ₹5 billion and above at least two CRAs should rate it. The rating must be RP4 or better. RP4 is a rating just a notch above sub-investment grade.
After the implementation, the accounts are to be monitored for one year (from the date of the first payment of interest or principal or reduction of aggregate exposure by 10%, whichever is later), and the extended specified period (where the aggregate exposure is repaid by at least 20%). If there is a default during this period, a fresh RP will be required.
Status of accounts
The account will get downgraded to “sub-standard” status immediately upon restructuring and will get upgraded to “standard” status only when it is rated as investment grade by the CRAs. After restructuring, the account should at least pay 10% of the aggregate exposure.
Supervision by RBI
Lenders acting with an intention to conceal the actual status of accounts or evergreen stressed accounts will be subjected to stringent supervisory or enforcement actions by the RBI, including, but not limited to, higher provisioning on such accounts and monetary penalties. It can also make references under the Insolvency and Bankruptcy Code.
With the FRESA, other instructions such as Framework for Revitalizing Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long-Term Project Loans, Strategic Debt Restructuring Scheme, Change in Ownership outside SDR, and Scheme for Sustainable Structuring of Stressed Assets have been withdrawn with immediate effect, and the Joint Lenders’ Forum has been dissolved.
The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.