The RBI circular directed lenders to refer loan accounts over Rs 2,000 crore under the Insolvency and Bankruptcy Code if it is not resolved in 180 days of default
The Supreme Court on Tuesday struck down Reserve Bank of India's (RBI's) February 12, 2018, circular on bankruptcy proceedings, in a major relief to stressed power and sugar companies. The RBI circular had made it mandatory for banks to ensure that a resolution plan (RP) is in place within 180 days of a ‘default’ of accounts, with exposure of Rs 2,000 crore or more. Failing this, such accounts were to be directed to the NCLT for insolvency proceedings.
The central bank had set the deadline of August 31, 2018 for banks to comply with this norm.
A two-judge bench of justice Rohinton Fali Nariman and justice Vineet Saran pronounced the judgement while hearing a bunch of petitions on the maintainability of the RBI circular.
The companies had earlier argued that "As per RBI, 157 companies were directly affected by the February circular and not one company has been resolved in the said timeline."
The circular also underscored IBC's status as the cornerstone of the bad loan resolution framework, superseding all previous mechanisms. The circular imposed a one-day default rule. Banks have to treat a company as a defaulter even if it misses repayment schedule by a day.
However, these norms have been criticised as being harsh in various quarters, including by a parliamentary committee.
Here we explain RBI’s new framework and its impact.
Timelines for Large Accounts to be Referred under IBC:
For loan accounts of Rs 2,000 crore or more, banks will have to ensure that a resolution plan is in place within 180 days after a ‘default’.
If not implemented within the timeframe, the account must be referred to the insolvency courts within 15 days.
For accounts with exposure of Rs 100 crore to Rs 2,000 crore a timeline for resolution will be announced over a two-year period.
Impact: This will strain the balance sheets of banks as the disclosure on their books has to be made much earlier than before.
Identify stress early:Lenders must identify emerging stress loans as special mention accounts (SMA) in three categories based on their default period:
|Basis for classification – Principal or interest payment or any other amount wholly or partly overdue between|
- Lenders must report credit information to Central Repository of Information on Large Credits (CRILC) on loans of Rs 5 crore and above.
- Any default in such loans needs to be reported to CRILC every Friday starting February 23.
- The CRILC-Main Report will need to be submitted on a monthly basis effective April 1, 2018.
Impact: Reporting of such nature will deter borrowers from defaulting for the fear of their names being known to the RBI. It will also alert other lenders while providing another other forms of finance.
Implementation of Resolution Plan:
All lenders must put in place Board-approved policies for resolution of stressed assets under this framework, including the timelines for resolution.
As soon as there is a default in the borrower’s account with any bank/lender, all lenders − singly or jointly − shall initiate steps to cure the default.
Impact: Lenders will get on their toes to be forced to take action against the defaulters sooner than later as was the case previously.The resolution plan can involve:
- Regularisation of the account by payment of all overdues by the borrower entity
- Sale of the exposures to other entities / investors
- Change in ownership
Implementation Conditions for Resolution PlanThe plan or the RP in respect of borrower entities to whom the lenders continue to have credit exposure, shall be deemed to be ‘implemented’ only if the following conditions are met:
- the borrower entity is no longer in default with any of the lenders
- if the resolution involves restructuring; then
In case of restructuring/change in ownership in accounts of Rs 100 crore and above, an independent credit evaluation (ICE) of the residual debt by credit rating agencies (CRAs) specifically authorised by the Reserve Bank, is required.
Accounts with exposure of Rs 500 crore and above shall require two such ICEs. Only such evaluated plans will be considered for implementation.
Impact: This is aimed at alerting the bankers on the underwriting norms while considering financing to the borrowers. Further, it also provides the current status and true picture of the borrower's financial strength and actions.
In case of restructuring, the account will be immediately downgraded to sub-standard and can be upgraded only when all the outstanding loan / facilities in the account demonstrate ‘satisfactory performance’ of no default at any time during the implementation period.
Impact: This is also aimed at providing the current status and true picture of the borrower's financial strength and actions.
Penalty if banks do not follow
Any failure on the part of lenders in meeting the prescribed timelines or any actions by lenders with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory / enforcement actions as deemed appropriate by the Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary penalties.
Impact: High provisioning and monetary penalties may impact the banks' profitability
Existing accounts under Insolvency and Bankruptcy Code.
Last year in two tranches, RBI identified around 40 NPA accounts to be taken to courts under the Insolvency and Bankruptcy Code.
List 1 in June – RBI identified 12 large accounts, with 25 percent share of total bad loans.List 2 in August – RBI identified 28 large and mid-sized loan acco