Every year there is an increase of non- performing assets (NPAs) in India. The capacity of banks to lend credit is getting decreased due to an increase in NPAs. In the light of the same, the Reserve Bank of India (RBI) had issued a circular on February 12, 2018 (the Circular), regarding the stressed assets of banks. According to the Circular, banks were told to start the resolution process as soon as a borrower defaults on a term loan and were given 180 days to cure it, failing which the account would have to be referred to the National Company Law Tribunal (NCLT). It prescribed the rule for recognizing one-day defaults by large corporates and insolvency action under the Insolvency and Bankruptcy Code, 2016 (IBC) as a remedy. However, the Supreme Court had quashed the Circular on April 2, 2019, stating that the Circular was ultra vires i.e. beyond the scope of the RBI’s powers.
The order of the Supreme Court was seen as a relief to companies in sectors such as telecom, power, infrastructure, shipping, steel industry, sugar, fertiliser and sports infrastructure. They claimed that the timeline of 180 days was without considering the challenges faced by the sectors. Further, the circular is arbitrary and violative of Article 14 of the constitution of India because it treated all sectors equally, which are in fact unequal. The Circular had also narrowed the window for resolution from 270 days, (as per the IBC) to 180 days (plus a grace period given of 15 days). Since the Circular stands quashed, the previous restructuring and debt resolution procedures under the IBC would be back.
Recently, RBI, via its notification dated June 7, 2019, (notification no.- RBI/2018-19/203 DBR.No.BP.BC.45/21.04.048/2018-19) (the June 7 Circular) replaced the Circular stating that defaults are to be recognized within 30 days instead of a one-day default rule previously. The lenders, during these 30 days may decide the resolution strategy that they wish to implement and draft a resolution plan for the same. RBI mandates that lenders should recognize incipient stress in the loan accounts immediately when the default [1] is made.
When a borrower is stated to be in default, the lenders shall take a prima facie review of such a borrower within 30 days of the default made which may be known as a review period. In cases where the amount is more than Rs. 1,500 crores but less than Rs. 2,000 crores, the reference date to calculate the review period shall commence from 1st January 2020. In cases where the exposure of borrowers toward lenders is Rs. 2,000 crore and above, the resolution plan should be implemented within 180 days and the review period has commenced from June 7, 2019. It is contended that that borrower shall not be on default on the 180th day from the day on which the review period has ended. The resolution plan would be deemed absolute when-
All the legal documents required have been executed;
The restructuring or changes made to the loans have been reflected in the books of accounts of the borrower; and
The borrower is not in default.
The institutions, which lend huge amounts, determine the non-recoverable portion of the debt and set it aside as provisions. Provisions are the estimated amount of loan losses that can be incurred. If however, the resolution does not take place within 180 days, then the institutions must make additional provisioning of 20% and if the resolution does not take place within 365 days, then further provisioning of 15% shall be made, meaning that the total provision beyond 1 year would be 35%. These provisions would be over and above the already existing and ageing provisions. Banks may refer cases to the NCLT if the resolution plan has not been implemented within the above-mentioned timelines.
The incentive given to the financial institutions to proceed under IBC is:
(a) half of the provisioning can be written back if the matter is filed with NCLT;
(b) entire provisioning can be written back if the matter is admitted before NCLT.
Further, where the resolution plan only involves payment of overdues by the borrower, the provisions may be reversed provided that the borrower is not in default for a period of 6 months from the date of clearing all the overdues
Project loans in which the date of commencement of commercial operations has been deferred, have been excluded and seen as an exception from the June 7 Circular. There has also been segregation made to identify various accounts which have been defaulted. These accounts are called as special mention accounts (SMA) and they are as follows –
SMA 0- where the default is between 1 to 30 days
SMA 1- where the default is between 31 to 60 days
SMA 2- where the default is between 61 to 90 days.
The scope of the term ‘restructuring’ has also been expanded. Now sale and leaseback transactions which involves the assets of the borrower shall also be considered as restructuring. Some of the instructions such as corporate debt restructuring scheme and revitalizing of distressed assets which were issued by the RBI earlier have been withdrawn.
Since the introduction of the IBC, almost Rs. 75,000 Crores have been recovered as of March 2019.[2] The RBI issued a Financial Stability Report on June 27, 2019, as per which, the Indian banks would see an improvement on bad loans and are expected to fall to 9% by March 2020.[3] The gross NPAs as per a percentage of total loans currently stands at 9.3% as when seen in March 2019.
While the Circular had changed the balance of power to the creditor from the borrower, the June 7 Circular tries to take a balanced approach which is not as extreme as the positions earlier.
[1] ‘Default’ means non-payment of debt (as defined under the IBC) when whole or any part or instalment of the debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be.
[2] https://www.livemint.com/companies/news/ibc-recovered-rs-75-000-crore-till-march-2019-1556879330649.html
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