With a view to mitigate the current financial stress caused to all borrowers due to the fallout of the economy with the outbreak of the Covid-19 crisis, the Reserve Bank of India issued a circular on the 'Resolution Framework for COVID-19 related Stress' on 6th August, 2020. This resolution framework provides a resolution window under the existing RBI (Prudential Framework for Resolution of Stressed Assets) Directions 2019, to curb the stress and financial panic caused amongst borrowers. This Prudential Framework is designed to recognize any and all incipient stress caused in loan accounts and provides a principle based resolution framework which addresses these defaults under normal circumstances. It is important to note though, that any such concession offered to a borrower under this resolution framework will lead to a substantial downgrade in the asset classification of the borrower's account. Thus, taking cognizance of the major risks posed to the financial stability of the borrowers, the RBI has introduced this Resolution Framework in order to enable lenders to implement a resolution plan in respect of all eligible borrowers without making any changes in the ownership, as well as personal loans. This shall be accomplished by classifying such exposures as 'standard' subject to the prescribed conditions. The reference date for the outstanding amount of debt which can be considered for resolution under the Resolution Framework is March 1, 2020.
Since this Prudential Framework is only applicable to certain specific categories of lending institutions, the applicability of the Resolution Framework was thus broadened to include all the Commercial Banks, Primary (Urban) Co-Operative Banks/State Co-Operative Banks/ District Central Co-Operative Banks, All-India Financial Institutions and Non-Banking Financial Companies (including Housing Finance Companies). Thus all such exposures of lending institutions which are not covered by the Prudential Framework shall also be included for any resolution under the Resolution Framework herein.
It is also important to note that all the norms which are applicable for the implementation of a resolution plan and the specific implementation conditions as given under the Prudential Framework, will be continued for any resolution plan that has been implemented under the Resolution Framework here.
The Eligible Areas
Every borrower or a facility shall be legible for such a resolution process under this Resolution Frameworks apart from the following categories:
- All the exceptions as specified under the Prudential Framework guidelines.
- All such MSME borrowers whose aggregate exposure to the lenders, is Rs. 25,00,00,000 (nearly 250 million) or less, as on March 1, 2020.
- All the farm credit that has been mentioned under the Master Direction issued by the RBI on priority sector lendings.
- All the loans provided to the primary agricultural credit societies, farmers' service societies and large-sized Adivasi multi-purpose societies.
- The exposures of the lenders to the financial service providers, as has been given under the Insolvency and Bankruptcy Code, 2016.
- The exposures of the lenders to the central, state and local governmental bodies and the body corporates established by an Act of the Parliament or State Legislature.
- The exposures of all such housing finance companies where the account has been rescheduled as per the Master Circular - The Housing Finance Companies (NHB) Directions, 2010 after March 1, 2020.
All Resolution of Stress in Exposures other than Personal Loans
All such eligible Loans, apart from any personal loans, which have been classified as 'standard', but not in default for a period of more than 30 days with the relevant lenders as on March 1, 2020, shall be eligible for resolution under this Resolution Framework. Such lender must continue their classification of such accounts as 'standard' up until the date on which the borrower and the relevant lenders proceed with the resolution plan.
Single Lender Exposures
In case there is only one lender with exposure to the borrower, such a relevant lender is allowed to take the decision with regards to the request for resolution by such borrower, according to the approved policy by the Board.
Multiple Lender Exposures
Where the borrowers have exposures to multiple lenders, the following conditions must be complied with for proper implementation of the resolution plan:
- Such a resolution process will be treated as invoked only if the relevant lenders who represent 75% by value of the total outstanding credit facilities (which is both fund based as well as non-fund based), and not less than 60% by number, agree to invoke this.
- Further an inter creditor agreement ("ICA") will also have to be signed by all the lenders, within a period of 30 days from the date of the invocation of the resolution process. Thus the lending entities, other than the ones covered under the Resolution Framework, are also permitted to sign the ICA and be bound by the same. The ICA must also provide mechanisms for dispute redressal as well as sufficient information sharing with the lenders.
- In case the lenders represent at least 75% by value, and not less than 60% by number, and not sign the ICA within the aforesaid timeline then the invocation time shall stand as lapsed and the resolution process shall not be invoked again in respect of such a borrower under the Resolution Framework.
- All such lenders, who sign the ICA document within the aforesaid timeline, must keep the provisions from the date of implementation of the resolution plan according to the extant income recognition and asset classification ("IRAC") norms just before the implementation, or 10% of the total debt held by the ICA signatories after implementation of the plan whichever is higher.
- All such lenders who fail to sign the ICA within the aforesaid timeline will, immediately upon the expiry of the aforesaid timeline, keep the provisions of 20% of their debt on their books as on that date or the provisions required according to the extant IRAC norms, whichever is higher.
- Wherein the invocation lapses as mentioned above, the lenders who had before agreed for the invocation of the resolution process but had not signed the ICA will have to hold 20% provisions on their carrying debt as well.
- Every such receipt and repayment by the borrower as well as all the additional disbursements to such a borrower as part of the resolution plan, shall be routed through an escrow account which has been maintained by one of the lenders. Such an escrow account must be operated in the manner set out in the escrow agreement for the same.
The Expert Committee
The RBI shall constitute an Expert Committee, which shall recommend the financial parameters that are required to be factored into the assumptions which form a part of each resolution plan, and the sector-specific benchmark ranges for such parameters as well.
Exposures:
The resolution plans for accounts wherein the aggregate exposure is Rs.100,00,00,000 (nearly 13 million) and above at the time of invocation of the resolution process, will require an independent credit evaluation by one credit rating agency which has been authorised by the RBI under the Prudential Framework.
All resolution plans, where the aggregate exposure of the Lenders at the time of invocation of the resolution process is Rs. 1500,00,00,000 (nearly 15 billion) and above, shall be vetted by the Expert Committee. However, this Expert Committee's scope shall be to verify whether all requisite processes have been followed by the parties without interfering with the commercial judgment.
Features of the Resolution Plan
- Such a resolution plan could involve any action, including the sale of the exposure to other entities, change in ownership and restructuring, except for compromise settlements which shall continue to be governed by the provisions of the Prudential Framework or the extant instructions.
- The resolution plan could also include the sanctioning of additional facilities even if there is no renegotiation of the existing debt at all.
- The lenders can now allow the extension of the residual tenor of the facility, with or without paying any moratorium, for a period of not more than 2 years.
- This moratorium period shall come into force immediately upon implementation of the resolution plan as well.
- The important factor to keep in mind is that the revised assumptions which form a part of the resolution plan must at least factor in the financial parameters decided by the Expert Committee.
Resolution of Stress in Personal Loans
- The Resolution Framework also gives the resolution of stress in personal loan accounts which have been classified as 'standard', but not in default for more than 30 days with the relevant lenders as on March 1, 2020.
- But such a Resolution Framework does not cover personal loans extended to the staff/ officers of the relevant lenders at all.
- Such lenders have to continue to classify the loan accounts as 'standard' till the date on which the borrower and the relevant lenders agree to proceed with a resolution plan.
- All such resolution under the Resolution Framework must be invoked anytime on or before December 31, 2020 and must be implemented within a period of 90 days from the date of invocation of the same.
- Such resolution plans could include rescheduling of payments, conversion of interest accrued/ to be accrued into another credit facility, or, granting of moratorium, based on an assessment of income streams of the borrower, subject to a maximum of 2 years only.
- Such a resolution plan shall also be deemed to be implemented only after all the necessary documentation is completed, the revised terms are reflected in the books of the relevant lenders and the borrower is not in default.
The performance analysis after the implementation of this Plan
- For personal loans, after the implementation of the resolution plan, the subsequent asset classification shall be governed as per the extant IRAC norms or any other relevant instructions as applicable.
- For exposures other than personal loans, any default by the borrower with any of the ICA signatories during the monitoring period must trigger a review period of 30 days.
- In order for this to happen, the 'monitoring period' means the period starting from the date of implementation of the resolution plan till the borrower pays 10% of the residual debt, subject to a minimum of 1 year from the commencement of the first payment of interest or principal on the credit facility with the longest moratorium period.
- If the borrower is in default with any of the ICA signatories at the end of the above mentioned review period, the asset classification of the borrower with all the lenders, including the non-ICA signatories, shall be downgraded to NPA from the date of implementation of the resolution plan or the date from which the borrower had been classified as NPA before implementation of the plan.
- In case the monitoring period is over without the account being classified as NPA, the asset classification norms shall revert to the criteria laid out in the extant IRAC norms or other relevant instructions.
Disclosures by lenders
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Every lender is required to make all the necessary disclosures in their quarterly or half-yearly or annual financial according to the prescribed formats, as applicable, in respect of accounts where resolution a plan has been incorporated.
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Furthermore, the credit reporting by such lenders in respect of borrowers wherein a resolution plan is implemented must necessarily reflect the restructured status of the account in case the resolution plan involves any renegotiations which are to be classified as restructuring under the Prudential Framework Plan.
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