RBI tightens rules for bad-loan resolution

The Reserve Bank of India (RBI) today announced revised framework for resolution of bank loan defaults, widening the net for bankruptcy proceedings against loan defaulters and in the process abolishing half a dozen existing loan-restructuring mechanisms, as the central bank looked at ways to accelerate resolution of the bad loans problem of state-run banks.

The new set of rules are aimed at creating a ''harmonised and simplified generic framework'' for resolution of stressed assets in view of new bankruptcy regulations, the RBI said in a release.

Since restructuring is an act in which a lender, for economic or legal reasons relating to the borrower's financial difficulty, grants concessions to the borrower. This would normally involve modification of terms of the advances / securities, which would generally include, among others, alteration of repayment period / repayable amount / the amount of instalments / rate of interest / rollover of credit facilities / sanction of additional credit facility / enhancement of existing credit limits / compromise settlements where time for payment of settlement amount exceeds three months, RBI noted.

In case of restructuring, the accounts classified as 'standard' shall be immediately downgraded as non-performing assets (NPAs), ie, 'sub-standard' to begin with. The non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring. In both cases, the asset classification shall continue to be governed by the ageing criteria as per extant asset classification norms.

Standard accounts classified as NPA and NPA accounts retained in the same category on restructuring by the lenders may be upgraded only when all the outstanding loan / facilities in the account demonstrate 'satisfactory performance' (ie, the payments in respect of borrower entity are not in default at any point of time) during the 'specified period' (as defined in paragraph 10 of the covering circular).

For large accounts (ie, accounts where the aggregate exposure of lenders is Rs100 crore and above) to qualify for an upgrade, in addition to demonstration of satisfactory performance, the credit facilities of the borrower shall also be rated as investment grade (BBB- or better) as at the end of the 'specified period' by CRAs accredited by the Reserve Bank for the purpose of bank loan ratings.

While accounts with aggregate exposure of Rs500 crore and above shall require two ratings, those below Rs500 crore shall require one rating. If the ratings are obtained from more than the required number of CRAs, all such ratings shall be investment grade to qualify for an upgrade.

In case satisfactory performance during the specified period is not demonstrated, the account shall, immediately on such default, be reclassified as per the repayment schedule that existed before the restructuring. Any future upgrade for such accounts shall be contingent on implementation of a fresh RP and demonstration of satisfactory performance thereafter.

Provisioning norms
Accounts restructured under the revised framework shall attract provisioning as per the asset classification category laid out in the Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated 1 July 2015, as amended from time to time. However, the provisions made in respect of accounts restructured before the date of the circular under any of the earlier schemes shall continue to be held as per the requirements specified therein.

Additional finance
Any additional finance approved under the RP (including any resolution plan approved by the adjudicating authority under IBC) may be treated as 'standard asset' during the specified period under the approved RP, provided the account performs satisfactorily (as defined in paragraphs 3-5 above) during the specified period. If the restructured asset fails to perform satisfactorily during the specified period or does not qualify for upgradation at the end of the specified period, the additional finance shall be placed in the same asset classification category as the restructured debt.

Income recognition norms
Interest income in respect of restructured accounts classified as 'standard assets' may be recognised on accrual basis and that in respect of the restructured accounts classified as 'non-performing assets' shall be recognised on cash basis.

In the case of additional finance in accounts where the pre-restructuring facilities were classified as NPA, the interest income shall be recognised only on cash basis except when the restructuring is accompanied by a change in ownership.

Conversion of loan into debt / equity
Under financial restructuring unpaid principal of loans will be converted to stocks or bonds while the interest thereupon will be converted to 'Funded Interest Term Loan' (FITL), debt or equity Instruments.

The FITL / debt / equity instruments created by conversion of part of principal / unpaid interest, as the case may be, will be placed in the same asset classification category in which the restructured advance has been classified.

These instruments shall be valued as per usual valuation norms and marked to market. Equity instruments, whether classified as standard or NPA, shall be valued at market value, if quoted, or else at break-up value (without considering the revaluation reserve, if any) as ascertained from the company's balance sheet as on 31 March of the immediate preceding financial year.

In case the balance sheet as on 31 March of the immediate preceding financial year is not available, the entire portfolio of equity shares of the company held by the bank shall be valued at Re1. Depreciation on these instruments shall not be offset against the appreciation in any other securities held under the AFS category.

The unrealised income represented by FITL / debt or equity instrument can only be recognised in the profit and loss account as under:

  • FITL / debt instruments: only on sale or redemption, as the case may be;
  • Unquoted equity/ quoted equity (where classified as NPA): only on sale;
  • Quoted equity (where classified as standard): market value of the equity as on the date of upgradation, not exceeding the amount of unrealised income converted to such equity. Subsequent changes to value of the equity will be dealt as per the extant prudential norms on investment portfolio of banks.

Change in ownership
In case of change in ownership of the borrowing entities, credit facilities of the concerned borrowing entities may be continued / upgraded as 'standard' after the change in ownership is implemented, either under the IBC or under this framework. If the change in ownership is implemented under this framework, then the classification as 'standard, shall be subject to the following conditions:

  • Banks shall conduct necessary due diligence in this regard and clearly establish that the acquirer is not a person disqualified in terms of Section 29A of the Insolvency and Bankruptcy Code, 2016;
  • The new promoter shall have acquired at least 26 per cent of the paid up equity capital of the borrower entity and shall be the single largest shareholder of the borrower entity;
  • The new promoter shall be in 'control' of the borrower entity as per the definition of 'control' in the Companies Act 2013 / regulations issued by the Securities and Exchange Board of India/any other applicable regulations / accounting standards as the case may be; and
  • The conditions for implementation of RP as per Section I-C of the covering circular are complied with.

For such accounts to continue to be classified as standard, all the outstanding loans / credit facilities of the borrowing entity need to demonstrate satisfactory performance (as defined above in paragraph 3 above) during the specified period. If the account fails to perform satisfactorily at any point of time during the specified period, the credit facilities shall be immediately downgraded as non-performing assets (NPAs), ie, 'sub-standard'.

Any future upgrade for such accounts shall be contingent on implementation of a fresh RP (either under IBC, wherever mandatory filings are applicable or initiated voluntarily by the lenders, or outside IBC) and demonstration of satisfactory performance thereafter.

Further, the quantum of provisions held by the bank against the said account as on the date of change in ownership of the borrowing entities can be reversed only after satisfactory performance during the specified period.

After enacting its first comprehensive bankruptcy regime in 2016, India last year gave the central bank more powers to push lenders to deal with the nearly $150 billion in troubled debt at banks, which has stymied new lending and slowed economic growth.

Last year, the RBI ordered banks to force roughly 40 of the biggest corporate loan defaulters into bankruptcy proceedings.

The new system will force lenders to identify and tackle any stressed-asset accounts more rapidly, the regulator said.