Revised RBI Circular On Stressed Loans Give Complete Discretion To Lenders To Design, Implement Resolution Plan

The RBI has issued a revised circular to resolve stressed assets by offering lenders a 30-day period to consider an account as a non-performing asset (NPA).

According to the RBI’s revised circular, under the new 'prudential framework for resolution of stressed assets', lenders will have complete discretion to design, implement resolution plans.

Incidentally, two months ago, the Supreme Court had quashed a Reserve Bank of India's (RBI) February 12 circular, which had mandated lenders to start resolution even in case of one-day default.

The revised circular largely maintains the basic spirit of the February 12 circular, which had mandated higher provisioning and bankruptcy options, disallowing any other resolution methods.

As per the revised RBI circular, banks or lenders may begin resolution or IBC process within 30 days of default of loans by following a board-approved policy for resolution of bad loans.

It has been made mandatory to sign an inter-creditor agreement (ICA) for all lenders, which would provide for a majority decision criterion, as per the revised RBI circular.

The RBI has changed its previous norm of 100% approval from creditors. The ICA would now provide any decision agreed by lenders representing 75% by value of total outstanding credit facilities and 60% of lenders by number, the circular stated. This is expected to expedite the resolution process.

The circular has stated that lenders must resolve NPA accounts which are more than Rs 2000 crore within 180 days.

Lenders would have to make higher provisioning in case of delay in resolution. Lenders would have to make a 35% provision. The first provision would be 20% for 180 days and then an additional 15%, if no resolution is found within 365 days.

As per the revised RBI circular, the joint lenders’ as a mandatory institutional mechanism has been discontinued.

Additionally, lenders would have to submit a weekly report of instances of default by all borrowers with aggregate exposure of Rs 50 million and above. Such a weekly report would have to be submitted on every Friday, or the preceding working day if Friday happens to be a holiday.

The circular has stated that for borrowers with exposure between Rs 1,500 crore and Rs 2,000 crore, new norms will be applicable from January 1, 2020, while for loans up to Rs 1,500 crore, new norms will be announced in due course.

The RBI circular has also warned that any attempt by lenders to conceal the actual status of their accounts or “evergreening” stressed accounts would invite stringent supervisory as well as enforcement action.