RBI has announced a resolution framework for COVID-19 related stress (‘Framework’) on August 6, 2020, for addressing borrower defaults pursuant to the stress caused by the pandemic – without necessitating a change of ownership and without asset classification downgrade, modifying the existing framework[1] (‘Prudential Framework’).
The Framework for COVID-19 stress covers resolution of both personal loan accounts and corporate loan accounts. For the purpose of this Client Alert, we have focused on the key changes introduced for resolution of corporate loan accounts (i.e. exposures other than personal loans).
| Applicability | The Framework is applicable to commercial banks, primary cooperative banks, state cooperative banks, district level cooperative banks, all India term financial institutions and all NBFCs including HFCs. |
| Eligibility |
- Only those borrower accounts a) which were classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020, and b) having stress on account of COVID-19, are eligible for resolution under this Framework.
- Banks and financial institutions are required to put in place board approved policies to ensure these criteria are met.
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| Exceptions |
- Micro, Small and Medium Enterprises (MSME) borrowers whose aggregate exposure to lending institutions collectively, is ₹25 crore or less as on March 1, 2020[2];
- Farm credit;
- Loans to financial service providers (as defined under the Insolvency and Bankruptcy Code);
- Central and State Governments, Local Government bodies (eg. Municipal Corporations), and body corporates established by an Act of the legislature; and
- Borrower exposures to HFCs which are restructured under certain existing guidelines.
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| Invocation |
- Invocation is the date on which borrower and lender (by applicable majority) have agreed to proceed with a resolution plan.
- If there are multiple lending institutions with exposure to the borrower, the invocation must be with agreement of lenders being 75 % (value) and 60 % (number).
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| ICA |
- In all cases involving multiple lenders, an inter-creditor agreement is required to be signed by all lenders within 30 days from invocation.
- In cases where the resolution process has been invoked but lenders representing at least 75% (value) and 60% (number), do not sign the ICA within 30 days, then the invocation will be treated as lapsed and the resolution process cannot be invoked again under the Framework.
- Lenders to the borrower which are not covered in this Framework may also sign the ICA, if they so desire. Lenders must ensure that the ICA contains a dispute redressal mechanism that clearly lays down the recourse available to its signatories.
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| Resolution Mechanisms |
- The resolution plans under this Framework may involve any of the mechanisms under the Prudential Framework, such as sale of exposure, change in ownership or restructuring or reschedulement of debt.
- Lenders are also permitted to extend the tenor of the facilities by up to 2 years.
- The plan may also involve sanctioning of additional facilities.
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| Implementation |
- Plan to be ‘implemented’ within 180 days from invocation. The conditions that must be met for a plan to be ‘implemented’ are specified in the Prudential Framework.
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| Asset Classification Relief |
- For existing credit facilities –
- If a resolution plan is implemented – ‘standard classification to continue or classification to be upgraded to ‘standard’ (if slipped into NPA) on implementation;
- If no resolution plan is implemented – no reliefs, asset classification as per prudential norms (from date of NPA).
- For additional finance –
- From ‘invocation’ until implementation – ‘standard’;
- On implementation – ‘standard’ asset classification to continue;
- If not implemented – as per asset classification applicable with respect to remaining credit facilities or performance (which ever is worse).
- Any default by the borrower with any of the signatories to the ICA during the monitoring period[3] will trigger a Review Period of 30 days. If default continues at end of review period – asset classification to be downgraded to NPA from original date of NPA classification/ date of implementation of plan (which ever is earlier).
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| Provisioning Relief |
- Additional provisioning on account of extant guidelines can be reversed on invocation of resolution process under this Framework.
- On implementation – provisioning to be 10% or as per prudential norms (which ever is higher).
- If lenders didn’t sign the ICA – then 20% or as per prudential norms (which ever is higher).
- If not implemented – as per prudential norms.
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| Other Aspects |
- The Reserve Bank has set up an Expert Committee (EC) chaired by Mr. K. V. Kamath which will make recommendations on the required parameters and sector specific benchmark ranges to be factored into each resolution plan.
- The EC will also validate plans for accounts with aggregate debt of Rs. 1,500 crore / more.
- Resolution plan for accounts where the aggregate exposure at the time of invocation is INR 100 crore or more require independent credit evaluation by any credit rating agency authorized by the RBI.
- In respect of accounts involving consortium / multiple banking arrangements, all receipts and repayments by the borrower and disbursals to the borrower, are to be routed through one lender escrow account.
- Other members of the EC include Mr. Diwakar Gupta, Mr. TN Manoharan, Mr. Ashvin Parekh and the IBA CEO.
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Key Takeaways:
- Currently, lenders are not permitted to initiate any insolvency proceedings for any loans that are in default after March 25, 2020 for a period of 6 months (currently set to expire on September 25, 2020, but extendable by another period of 6 months). Therefore, lending institutions will be substantially incentivized to explore a resolution plan under the Framework for any accounts that are in stress on account of COVID-19. However, lending institutions will need to be quick in deciding which accounts should be referred to resolution under the Framework, especially for accounts where a moratorium has already been granted (currently available for payments due till August 31, 2020), on account of eligibility conditions prescribed under the Framework.
- It remains to be seen whether the 180 day timeline is feasible for implementing the resolution plan under the Framework. The voting threshold of 75% in value and 60% in number may also limit the ability of lenders to quickly implement resolution plans, given past experiences with other debt restructuring schemes notified by the RBI.
- Lending institutions need to put in place board approved policies for evaluating whether a borrower is indeed under “COVID-19 related stress”. Court decisions have suggested that all defaults that have occurred during the moratorium period are to be classified as COVID-19 related defaults regardless of any other factors that may have caused the default; it remains to be seen if RBI will share the same opinion.
[1] RBI (Prudential Framework for Resolution of Stressed Assets) Directions 2019, dated June 7, 2019.
[2] The RBI has declared a separate modified framework for resolution of distressed MSME borrowers – under its separate notification issued on August 6, 2020.
[3] Monitoring period is from the date of implementation of the resolution plan till the borrower pays 10 percent of the residual debt, subject to a minimum of 1 year from 1st payment of interest / principal (whichever is later) on the facility with longest moratorium.
Authors :
Anand Shah, Senior Partner
Ishan Handa, Partner
Saloni Thakkar, Senior Associate
Nihal Sharma, Associate
Aug 20, 2020