The RBI has, vide notification dated 06.08.2020, issued a new framework for resolution of stressed loans caused by Covid-19. I am discussing the relevant portion of this notification in my own words in simple and clear language in three parts.
Part-I (General overview of the framework)
Existing frameworks for restructuring of loans before issue of this latest notification:
a) Guidelines for restructuring of MSME loans vide circular dated 11.02.2020 (for MSME borrowers with exposure upto Rs. 25 crores)
b) Prudential Framework for resolution of stressed assets issued on 07.06.2019 (for all other borrowers)
Applicability:
This new framework shall be applicable to all borrowers and all credit facilities; except the following:
a) MSME borrowers having aggregate exposure upto Rs. 25 crores (both fund based and non fund based) from all lenders as on 01.03.2020 (because, for them there is already guidelines dated 11.02.2020)
b) Farm loans
Why the need for this new framework:
a) The guidelines dated 11.02.2020 are applicable to only MSMEs with aggregate exposure upto Rs. 25 crores from all lenders. Non MSME borrowers have also got affected equally by Covid induced stress.
b) The existing framework dated 07.06.2019 provides that any standard loan account on restructuring shall be immediately downgraded to NPA except when there is change in management also along with restructuring. Due to covid induced economic stress, financial position of many borrowers who were otherwise sound, got adversely affected. It is not fair to downgrade them as NPA since the stress is not any borrower specific but systemic. It is also not fair to force change in management without any fault of the existing management. So, a new framework was required to fairly deal with this stress for non MSME borrowers without inducing change in management and without downgrading the loans and at the same time without compromising on the health of the banking system.
Main points for noting:
a) This new framework is applicable for both corporates and non-corporates and also individuals.
b) This facility shall be provided to only those borrowers in whose case stress has been caused by Covid.
c) The lenders will have to assess viability of the borrower carefully before granting resolution.
d) Each lender shall place in force a Board approved policy to implement this notification.
e) The borrowers who don't qualify to be restructured under this framework can be governed under existing framework dated 07.06.2019.
f) The reference date for outstanding amount of debt that can be considered for restructuring shall be 01.03.2020.
The main provisions of this new framework are stated in next two parts.
Part-II (Only for personal loans as defined below)
Applicability:
This part shall be applicable to all ‘personal loans’ granted by lenders to individual borrowers.
Note: loans granted by lenders to their own staff not eligible to be restructured under these guidelines.
Meaning of personal loans:
‘Personal loans’ as defined in RBI notification dated 04.01.2018 means- loans given to individuals consisting of loans for consumer durables such as smart phone, credit card dues, auto loans for personal use; personal loans secured by gold, immovable property, fixed deposits, shares, debentures, bonds, NSCs etc. (but not for business purposes); personal loans to professionals for purposes other than business purposes, loans given for other consumption purposes such as for marriage expenses, education loans, housing loans, loans against property (for other than business purposes) and loans given for investment in financial assets such as shares.
The Scheme:
a) Only those borrowers shall be eligible for restructuring who were standard and not overdue for more than 30 days as on 01.03.2020 with the lender
b) Such eligible borrower’s all credit facilities should continue to be standard till the date of invocation of resolution under this framework. For this purpose, the date on which both the borrower and the lender agreed to proceed under this framework shall be treated as date of invocation.
c) The lender and the borrower can invoke (i.e. agree for) resolution under this framework latest by 31.12.2020 and shall have to implement the restructuring within 90 days from the date of such invocation.
d) The restructuring may involve rescheduling of repayments, concession in interest, conversion of unpaid interest into FITL, granting of moratorium of maximum 2 years from the date of implementation of restructuring plan and consequent extension of overall loan tenor by a term equal to moratorium granted, if any.
e) The restructuring shall be deemed to be implemented when all the following conditions are met:
- i) All related loan documents have been executed between borrower and lender
- ii) The changes in terms & conditions of the loan gets reflected in accounts of the lender meaning the changes have been effected by the lender in its CBS.
- iii) Borrower is not in default as per revised terms & conditions
Note: Any restructuring conducted in violation of these guidelines shall attract the existing resolution framework dated 07.06.2019 resulting into down gradation of the account into NPA.
Part-III (For business loans)
Applicability:
a) This part is applicable to all eligible loans (as defined in Part-I) except ‘personal loans’ described in Part-II earlier.
b) Only those borrowers shall be eligible for restructuring who were standard and not overdue for more than 30 days as on 01.03.2020 with any lender.
The scheme:
a) In case of sole banking arrangement, the lender may take decision according to its Board approved policy on request of the borrower for resolution under this framework.
b) Such eligible borrower’s all credit facilities should continue to be standard till the date of invocation of resolution under this framework. For this purpose, the date on which both the borrower and the lender (in case of sole banking) agreed to proceed under this framework shall be treated as date of invocation.
c) In case the borrower has exposures from more than one lenders, the date on which lenders representing at least 75% by value of aggregate exposures to that borrower (both fund and non fund based) and at least 60% of borrowers in number agree to proceed ahead with resolution shall be deemed as the date of invocation of resolution under this framework.
d) Resolution under this framework has to be invoked latest by 31.12.2020 and has to be fully implemented within 180 days from the date of invocation.
e) In case of multiple lenders, ICA has to be signed between the lenders within 30 days from the date of invocation of resolution.
f) In case of multiple banking arrangement, if the lenders representing at least 75% in value of aggregate exposure to such borrower and at least 60% in number fail to sign ICA within 30 days from invocation, the invocation shall lapse on 30th day and the resolution under this framework can not be invoked again. If the lenders subsequently want to go ahead with resolution of such borrower, they have to proceed under the existing framework dated 07.06.2019 resulting into downgradation of the account into NPA.
g) If any of these timelines are breached anytime, the resolution process in respect of that borrower shall cease immediately. Any restructuring conducted in violation of these guidelines shall attract the existing resolution framework dated 07.06.2019 resulting into downgradation of the account into NPA.
h) The RBI has constituted an expert committee to recommend a list of financial parameters to be considered by lenders while permitting resolution and also industry specific benchmarks for such parameters. The RBI will communicate such parameters and benchmarks later on.
i) The said expert committee shall also vet all resolution proposals having aggregate exposure of Rs. 1500 crores and above from all lending institutions on the date of invocation of resolution.
j) The resolution plan may involve any action/plan/reorganisation including regularisation of account by the borrower, sale of exposures by lenders to other entities or investors, change in ownership, conversion of a part of outstanding debt into equity or other structured debt or restructuring of loans but not compromise settlements. It may also involve sanction of additional finance to meet exigencies of the borrower.
k) The lender may allow extension in tenor of the loan, with or without moratorium, by upto two years. The moratorium, if granted, shall commence immediately on implementation of resolution plan.
l) Additional provisions has to be made in respect of accounts wherein resolution is sanctioned under this framework or where invocation lapsed due to non signing of ICA by requisite majority of lenders.
The author can also be reached at ca.mahesh1985@yahoo.com
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