On 12 February, the Reserve Bank of India (RBI) issued a revised framework on resolution of stressed assets. The revised framework replaces most of the RBI’s previous guidelines on stressed assets, and tries to align the guidelines with the current regime under the Insolvency and Bankruptcy Code, 2016 (IBC).
The revised framework applies to all scheduled commercial banks (except regional rural banks), and all-India financial institutions such as the EXIM Bank.
Loan accounts having lenders’ exposure of ₹20 billion (US$305 million) or more are defined as large accounts. For such accounts a resolution plan (which includes restructuring of the existing terms and conditions of the loan) needs to be implemented within 180 days from 1 March 2018 (the reference date), if the borrower is in default on that date, or the date of the first default by the borrower after the reference date.
The RBI said that it will announce over a two-year period the reference dates for implementing the resolution plan of loan accounts having lenders’ exposure from ₹1 billion to ₹20 billion, to ensure calibrated, time-bound resolution of all such loan accounts in default.
If the resolution plan of a large account is not implemented within the above timelines, the lenders must file an insolvency application in the National Company Law Tribunal (NCLT), individually or jointly, under the IBC within 15 days from the expiry of the timeline.
Lenders must obtain independent credit evaluations (ICEs) of the residual debt by credit rating agencies authorized by the RBI for this purpose. Loan accounts with aggregate exposure of ₹5 billion and above will need two ICEs and others will need one ICE.
According to the RBI, several restructuring schemes that were introduced to improve the resolution of stressed infrastructure project loans in India failed to achieve the desired results because they were cherry-picked by lenders to keep loan loss provisions low rather than to resolve stressed assets.
The revised framework will adversely affect the resolution of debt-ridden capital-intensive projects as the restructuring of such accounts within 180 days from the date of default will be challenging in view of the criteria provided for “implementation”.
The revised framework will affect the financial health of lenders in the short run, on account of higher provisioning at the date of default, however, in the long run the strict timelines and certainty of action will improve the recovery of project loans and preserve public wealth, and promoters and lenders will have more skin in the game.
Some key issues that arise in relation to the revised framework are as follows:
- There is no clarity on whether it applies to project loans provided by non-banking financial companies and foreign lenders.
- It does not prescribe any threshold amount for triggering a default under a loan account.
- Unlike the previous framework, it does not provide for constituting a joint lenders committee and thresholds for decision-making by lenders for implementing a resolution plan. Such provisions help in implementing a resolution plan in a coordinated and time-bound manner. In the absence of such provisions, coordination among the lenders, and thus the implementation of the resolution plan within 180 days from the date of default may not be possible for large highly leveraged stressed capital-intensive projects where multiple lenders are exposed to the project.
- As the previous restructuring framework has been repealed, lenders may find it difficult to restructure project loan accounts having exposure of less than ₹20 billion as the RBI has not yet issued any timelines for resolution plans for such accounts.
- Where resolution of stressed project loans involves change in ownership, lenders may not have time to complete a full due diligence to clearly ascertain whether a prospective investor is disqualified to participate in the resolution process under section 29A of the IBC. This would be even harder in the case of a foreign investor.
- It is unclear whether conversion of debt into equity of a listed borrowing entity and subsequent transfer to a new investor under the revised framework will be exempted from compliance with regulations of the Securities and Exchange Board of India. Such an exemption was previously available in certain cases.
Given the strict timelines under the revised guidelines, it seems that the RBI is keen on pushing all stressed cases to the NCLT for resolution. Only time will tell if this one-size-fits-all approach will help in resolving the problem of stressed project loans.
Avinash Kumar Khard is an associate partner at HSA Advocates. HSA is a full-service ﬁrm with ofﬁces in New Delhi, Mumbai, Bengaluru and Kolkata.
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