The new RBI Framework on Stressed Assets has resolved many infirmities of the February 12 RBI Circular, but will this be sufficient to make it practical?
There has been a significant rise in stressed assets in the Indian economy, especially with the public sector banks. A slowing economy is generally identified as the primary cause for the same. However, if the regulatory aspect for loan management is looked at closely, several deficiencies in procedures followed in extending and monitoring credit are clearly identifiable. In last few years, there has been a massive surge in growth of stressed assets, which coupled with liquidity crunch has become a matter of concern for the banking sector. In its latest effort to curb the stressed assets menace, RBI had released a Circular  dated 12th February 2019 on “Revised Framework for Stressed Assets” [“Feb12 Circular”], which was later replaced by Notification  dated June 7, 2019 [“New Framework”].
Problems in the February 12 Circular
The Feb12 Circular was based on the premise that any default in loan payment is an indicator of account being a “stressed asset”. Accordingly, it set out very stringent policies and steps to be followed by the lenders in case any default in paying loans happened. Some of these provisions were vehemently opposed, as being too stringent, near to stifling:
- Lenders were required to initiate resolution process/ restructuring immediately upon the default [“One day default rule”]. This was opposed by both borrowers (as any default was deemed as a wilful default) as well as lenders (as in case of non-compliance with the procedure, they were penalised)
- Approval from 100% of lenders was required in the Inter-Creditor Agreement, which meant that each lender was to be taken onboard in order to finalise a resolution plan.
Hence, at the outset, it is clear that this circular did not account for any practical realities in the legal and business system. It was declared as ultra vires by the Supreme Court in Dharani Sugars & Chemicals Pvt. Ltd. v. Union of India  and was subsequently replaced.
What does the new Framework Say?
The New Framework, aptly named as “Prudential Framework for Resolution of Stressed Assets” expects a proactive and self-initiated approach to be taken by the lenders. Lenders are expected to
- Report all accounts having funds more than Rs. 50 million to Central Repository of Information on Large Credits [“CRILC’].
- Report every case of default on loan payment on a weekly basis to CRILC in a given format. 
- Formulate a board approved-Lender Policy on “Resolution and Recovery of the Stressed Assets in a timely manner”.
Furthermore, following procedure has to be undertaken by lenders in case of payment default on loans:
- Recognize all related accounts as a stressed asset and include information of default on the loan in CRILC weekly report.
- Review account details within 30 days from the date of default [“Review Period”]
- In case a Resolution Process [“RP”] has to be initiated, enter into an Inter Creditor Agreement [“ICA”] with other lenders.
- Submit the Lender Policy in the Resolution Process [“RP”] ICA has to decide on the final RP by at least 60% votes of total number of lenders.
- Get evaluation of the RP by an Independent Credit Agency, if loan in question, amounts to more than Rs. 1 Billion.
- Implement RP within 180 days from end of Review Period. Implementation is said to be completed only if the borrower is no longer in default of any lender on the 180th
- In case of any delay in implementation of RP, make additional provisions in the loan amount.
- Mention all ongoing and finished RP’s in Financial Statements under “Notes on accounts”.
How is it different from the February 12 Circular?
The February 12 Circular was applicable only to Scheduled Commercial Banks and All-India Financial Institutions only, thus excluding all NBFC’s and regional rural banks.  Under RBI Circular on Loan Origination Scheme , many NBFC’s had partnered with Commercial Banks in partaking 20% exposure in disbursement of loans. In case of default of these loans, NBFC’s could not recover their loans through the aforementioned process, invalidating ICA’s. The new circular has rectified this issue by recognizing ND-SI NBFC’s as lenders. However, NBFC’s cannot suo motto initiate a resolution process here, as defaults can only be reported by Commercial Banks.
- 30-day Review Period
Initially, lenders were supposed to report an account as “Non-Performing Asset”, immediately in case of any default after the stipulated date. Lender’s claimed that this practice damaged their reputation and created impediments in future borrowings. Borrowers, on the other hand were even worse hit, as their accounts holding amount more than Rs. 2000 Crores could be declared as NPA even due a minor default in payment. Now, a “Review Period” of 30 days from the date of first default, has been introduced for lenders to review accounts and formulate RP. Both borrowers and lenders are benefitted as the former gets an additional 30-day period to repay the debt whilst the latter can formulate a better suited Resolution Process if it were to start.
- ICA- RP application
Earlier, 100% of lenders in an ICA were to agree to finalize a RP. This threshold was much higher than its counterparts in other resolution schemes like Insolvency and Bankruptcy Code (75%)  and Joint Lenders Forum (60%)  and nearly impossible to comply with. Now, the threshold was reduced to 60% of lenders by number or 75% by value to make it binding on the rest of the lenders as well as the borrower.
Issues in the current circular- What can be improved?
- “One size fits all” approach is not feasible.
The Supreme Court had pointed in Feb12 Circular that a “one size fits all” approach of RBI in terms of imposing payment and time periods is erroneous. Borrowers belong to a variety of industrial sectors, wherein conditions service and business impose different operational timelines. The Court gave a reference to the Power Sector, wherein 40th Parliamentary Standing Committee Report  held that “Implementation of Resolution Plan within 180 days was impossible and that a minimum period of 12 months would be required for practical purposes”.
Furthermore, the Allahabad High Court had opined in Independent Power Producers Association v. Union of India , that “mechanical application of RBI guidelines would push defaulting borrowers into further trouble without any hope of recovery”. Since it is clear that imposing different timelines for different borrowers would not be practically feasible , timeline for implementation of RP should be increased uniformly.
- No provision of “out of court settlements”
Under present status quo of the new circular, all schemes for debt resolution like Corporate Debt Restructuring , Strategic Debt Restructuring , Scheme for Sustainable Structuring of Stressed Assets , and Joint Lender’s Forum (JLF)  have been scrapped. These schemes pertained to out of court settlement procedure, providing more flexibility to lenders in loan recovery process. Also, another contemporary suggestion under “Project Sashakt” about creation of an Asset Management Company where investors could invest in the lender through an Alternate Investment Fund has also not been included.
Indian economy is finding itself between a rock and a hard place, in respect of stressed assets. The institutional “rigor mortis” under the February 12 Circular would have only worsened the situation, as even standard accounts could turn into stressed assets by a minor delay in payment. This would have added further bulge in the already rising pile of stressed assets. RBI has created a better balance of stringency and ease in this regard under the new framework as it is very strict in terms of compliances to be done but at the same time provides an additional time period to ease the process. Success of the new framework is largely contingent on adherence to the 180-day period for implementing RP. This has a bad track record under the IBC. Let’s see if this circular does not turn out to be another redundant process before the IBC proceedings.
Aditya Jain is a Fourth year B.A., LL.B (Hons.) student at the National Law University, Jodhpur.
- RBI February 12, 2018, Circular on Resolution of Stressed Assets- Revised Framework, RBI/2017-18/131, DBR.No.BP.BC.101/21.04.048/2017-18
- RBI Notification on Prudential Framework on Stressed Assets, June 7, 2019, RBI/2018-19/203, DBR.No.BP.BC.45/21.04.048/2018-19
- RBI Notification on Reporting to Central Repository on Information on Large Credits, May 22, 2014, RBI/2013-14/601, DBS.OSMOS.No.14703/33.01.001/2013-14
- Supra Note 3
- RBI September 21, 2018 Master Circular on Co-origination of Loans by Banks and NBFC’s for lending to priority sector, RBI/2018-19/49, CO.Plan.BC.08/04.09.01/2018-19
- Section 28(3), The Insolvency and Bankruptcy Code,2016
- RBI Notification on Framework for Revitalising Distressed Assets in the Economy-Guidelines on Joint Lender Forum (JLF) and Corrective Action Plan (CAP), February 26, 2014, RBI/2013-14/503, DBOD.BP.BC.No.97/21.04.132/2013-14
- 40th Parliamentary Standing Committee Report
- RBI Notification on Corporate Debt Restructuring, June 25, 2001 ,DBS.FID No. C-2 /01.11.00/ 2001-02
- RBI Notification on Review of Prudential Guidelines – Revitalising Stressed Assets in the Economy, February 25, 2016 , RBI/2015-16/330 BP.BC.No.82/21.04.132/2015-16
- RBI Notification on Scheme for Sustainable Structuring of Stressed Assets, June 13, 2016 , RBI/2015-16/422, No.BP.BC.103/21.04.132/2015-16
- Supra, Note 8