[By Suprabh Garg and Arshit Kapoor]

The authors are third and second year students of National Law University, Odisha

BACKGROUND

The Reserve Bank of India (“RBI”) has finally released the much-awaited circular for dealing with stressed assets named Prudential framework for Resolution of Stressed Assets (“Framework”) [[i]]. This circular is a replacement for the earlier circular on Resolution of Stressed Assets dated 12^th February 2018 (“Earlier Circular”) [[ii]]. The earlier circular had been struck down by the Hon’ble Supreme Court in Dharani Sugar and Chemical Ltd. v. Union of India [[iii]].

The Framework is released by the RBI with a view for providing early recognition, reporting and time bound resolution of stressed assets. This Framework and Direction is issued by the RBI without prejudice to Section 35 AA of The Banking Regulation Act, 1949 which empowers the RBI to direct banks for initiation of insolvency proceedings against specific borrowers [[iv]].

APPLICABILITY

The Framework has expanded the scope of applicability and covers in the definition of “lenders”:

1. Scheduled Commercial Banks
2. All India Term Financial Institutions
3. Small Finance Banks; and
4. Systemically Important Non- Deposit taking Non- Banking Financial Companies (NBFC-ND-SI) and Deposit taking Non-Banking Financial Companies (NBFC-D).

MODUS OPERANDI-FRAMEWORK FOR RESOLTION OF STRESSED ASSETS

The modus operandi of the Framework can be fragmented into the following systematic and sequential steps as under:

Early Identification and Classification Of Stresses Assets

The lenders, upon default have to recognize and classify the emerging-incipient stress in loan accounts and classify them into Special Mention Accounts (“SMA”). The word ‘default’ has been assigned the same meaning as defined under Section 3 (12) of IBC

The classification of debts into Special Mention Accounts shall be done as per the following categories:

In case of stress other than revolving credit facilities like cash credits, the SMA sub-categories will be as follows:

SMA Sub- Categories	Basis for Classification- Principal/ Interest Payment/ Any other amount wholly or partly overdue between
SMA-0	1-30 Days
SMA-1	31-60 Days
SMA-2	61-90 Days

 

Whereas in case of stress revolving credit facilities like cash credits, the SMA sub-categories will be as follows:

 

 

SMA Sub- Categories	Basis for Classification- Outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for a period of:
SMA-1	31-60 Days
SMA-2	61-90 Days

 

Reporting Of Stresses Assets

The lenders have to then, report to the Central Repository of Information on Large Credits (“CRILC”) regarding the credit information, including the classification into SMA, of all borrowers having an aggregate exposure of ₹ 5 crores or more, with them. The lenders in this regard have to submit CRICL-Main Report on monthly basis and a weekly report of the instances of default by all borrowers having an aggregate exposure of ₹ 5 crores or more, with them.

Resolution Plan

As per the Framework all the lenders have to place a board RP which would contain the action, plan and reorganization of stressed assets. The RP may also include the reorganization of the accounts by payment of all over dues, sale of exposures to other entities, change in ownership, restructuring etc. All the RPs have to be well-documented by all the lenders concerned [[v]].

Review Period

In cases, where any default is reported by any of the Scheduled Commercial Banks, All India Term Financial Institutions or Small Finance Banks, they have to take a prima facie review of the borrower account within thirty days of such default. (“Review Period”).

The Framework has given complete discretion to the lenders to decide on the resolution strategy, the nature of the resolution plan and the approach for implementation of resolution plan.

Inter-Creditor Agreement

The lenders have to then enter into an inter-creditor agreement (“ICA”) during the Review Period to finalize the ground rules and their strategy for implementation of RP.  Furthermore, the ICA has to inter-alia provide for rights and duties of majority lenders, duties and protection of dissenting lenders etc. The Framework provides the threshold of 75% by value of total outstanding credit facilities and 60% of lenders by numbers, for the decision to be binding on all the concerned lenders.

Time Period for Implementation

The Framework mandates the implementation of RP within 180 days from the end of review period. Further, with respect to existing defaults, the review period shall commence from 7^th June, 2019 for all the defaults having an aggregate exposure of ₹ 2,000 crores and 1^st January, 2020 for all the defaults having an aggregate exposure between ₹ 1,500 crores to ₹ 2,000 crores.

Additional Provision For Delayed Implementation of Resolution Plan

The Framework has provided for mandatory making of ‘additional provision’ of 20% by the lenders in cases where a viable RP is not implemented within the stipulated time i.e. 180 days from the end of review period and a further 15% (i.e. total of 35%) if the delay crosses a time limit of 365 days from the end of review period.

These additional provisions have to be made above the already held provision or provisions required to be made as per the status of the asset classification of the borrowers account, whichever is higher.

Situations Where Additional Provision May Be Reversed

The framework provides that when the RP involves restructuring or change in ownership outside IBC, the additional provisions may be reversed upon implementation of the RP.

However, the additional provision may also be reversed in cases where RP involves payment of overdues by the borrowers and the same has been cleared.

Further, where RP is pursued under IBC, half of the additional provision made may be reversed upon filing of insolvency proceedings under Section 7 [[vi]] and another half may be reversed upon the same being admitted by the respective NCLT.

Furthermore, in all cases where assignment of debt or recovery proceedings are completed, the additional provisions may be reversed.

ANALYSIS OF THE FRAMEWORK FOR RESOLTION OF STRESSED ASSETS

Striking a Balance

The Framework not only gives liberty and ample discretion to lenders to strategize and proceed with the resolution plan as they desire but also it has been issued without prejudice to Section 35AA of the Banking Regulation Act [[vii]]. This implies that RBI has reserved the power to issue specific instructions to banks to proceed under IBC in specific cases or against corporate houses which are troubling the process.

Progressive Strictness

The reference dates provided in the framework mandates early actions towards large stressed assets. This mechanism can be termed as “Progressive Strictness” and can be very fruitful towards the problem of countering Non-Performing Assets.

Initiation Of Insolvency Proceedings- Mandatory To Voluntary

RBI has made the direction of initiating CIRP from mandatory to voluntary, initiating CIRP will be preferred by banks than creating cumulative provision over loans at the end of 180 days after the review period. Thus, it is a coercive way by which banks are forced by RBI to initiate CIRP without the invocation of Section 35AA of the act.

Review Period- Sufficient Time to Lenders to Strategize

The earlier circular mandated lenders to recognize default within one day and initiate action. However, this circular gives more room to lenders by giving them a 30-Day review period. The Framework has given complete discretion and a considerable amount of time to the lenders to decide on the resolution strategy, the nature of the resolution plan and the approach for implementation of resolution plan.

Least Liquidation Value To The Dissenting Lenders-Discrimination Amongst Lenders

One of the flaws of this revised framework is the provision of providing at least liquidation value to ‘the dissenting lenders. It is pertinent to start that the earlier, Regulation 38 of the IBBI Regulations [[viii]] which mandated for providing liquidation value to the dissenting creditors was held to be discriminatory by the appellate tribunal in Central Bank of India v. Resolution Professional of the Sirpur Paper Mills Ltd. & Ors. [[ix]].

Consequently, in pursuance of the aforementioned ruling the same was amended in 2018 and this provision of liquidation value was removed. The same should not have been included in the new circular owing to the possible discrimination among the lenders.

IMPLICATIONS OF THE FRAMEWORK FOR RESOLTION OF STRESSED ASSETS

This Framework has come out as a breather for the power sector and allied sectors and the much-stressed power sectors has welcomed this new RBI circular [[x]]. As this will not force the power firms to CIRP and will give a fair opportunity for resolution without going under IBC unlike the earlier circular, which was not being considered healthy for the power sector.

This circular seeks 60% (and 75% of the total debt by value) affirmation of the total lenders for the approval of resolution plan unlike the previous circular which compelled to have 100% approval, thus there will be more chances of early resolution than going to arduous CIRP under IBC.

Under the Framework, the only way to reverse the additional provision over debts without completion of RP, is to file insolvency proceedings under IBC. Consequent to which, we may see large number of cases being referred to NCLT as lender banks will not prefer creating such huge provisions as mandated by the framework.

Further, the borrower-corporate debtor may drag itself to insolvency under Section 10-IBC if it finds the Resolution Plan to be prejudicial to its interest. The new circular should have been barred the corporate debtor from filing an application under Section 10 of the IBC to give more stability to the process.

Thus, it can be implied that the resolution period will be reduced significantly and the new circular will lead to better and faster resolution of stressed assets. This observation can be affirmed by the comments of Moody’s Investor services which has rated the banks as credit positive [[xi]].

[i] Reserve Bank of India, Prudential Framework for Resolution of Stressed Assets, Dated June 7, 2019, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11580

[ii] Reserve Bank of India, Resolution of Stressed Assets – Revised Framework, Dated February 12, 2018 https://rbidocs.rbi.org.in/rdocs/notification/PDFs/131DBRCEC9D8FEED1C467C9FC15C74D01745A7.PDF

[iii] Dharani Sugars and Chemicals Ltd. v. Union of India & Ors., Transferred Case (Civil) No. 66 of 2018.

[iv] Tax Guru, “RBI Releases Prudential Framework for Resolution of Stressed Assets”

https://taxguru.in/rbi/rbi-releases-prudential-framework-resolution-stressed-assets.html.

Also, at Reserve Bank of India, Prudential Framework for Resolution of Stressed Assets, Dated June 7, 2019, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11580

[v] Reserve Bank of India, Prudential Framework for Resolution of Stressed Assets, Dated June 7, 2019, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11580

[vi] The Insolvency and Bankruptcy Code, 2016.

[vii] The Banking Regulations Act, 1949.

[viii] Regulation 38, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process For Corporate Persons) Regulations, 2016.

[ix] Company Appeal (AT) (Insolvency) No.  526 of 2018.

[x] The Hindu Business Line, “New RBI Circular a Breather to Power Sector, but Fails to Address Core Issues” https://www.thehindubusinessline.com/money-and-banking/new-rbi-circular-a-breather-to-power-sector-but-fails-to-address-core-issues/article27901460.ece

[xi] Business Standard India, ‘RBI’s Revised NPA Circular Credit Positive: Moody’s’, https://www.business-standard.com/article/news-ians/rbi-s-revised-npa-circular-credit-positive-moody-s-119061000467_1.html.

Also, at The Hindu Business Line, “New RBI Circular a Breather to Power Sector, but Fails to Address Core Issues” https://www.thehindubusinessline.com/money-and-banking/new-rbi-circular-a-breather-to-power-sector-but-fails-to-address-core-issues/article27901460.ece.