RBI issues new NPA recognition norms: The guidelines put onus on creditors to take call on resolution plan, but will it work?

After the Supreme Court had struck down the earlier notification of the RBI relating to dealing with stressed assets, the fresh set of rules were eagerly awaited. The new stressed assets resolution framework released on Friday resembles very closely the earlier one except that it does not force companies to be led to the Insolvency and Bankruptcy Code (IBC). To this extent, it is less severe on defaulting companies and actually passes on the onus to banks to seek a logical end for the cases.

Let us look at the various steps that have to be taken. First is the identification of the stress in the form of classification under SMA0, SMA1, and SMA2 accounts based on the number of days in default which can range from 1-90 days. Second, once they are identified this has to be reported to the CRILC (Central Repository of Information on Large Credits) so that this information can be shared by all lenders. The limit for this is Rs 5 core of exposure which is considered to be large. The third is for all Bank Boards to have in place policies for resolution so that before the default takes place the ground rules are known on what should be done when the default actually takes place. The banks need to draw a plan in 30 days so that the road map is known.

Fourth, for the resolution plan (RP) to be implemented, the Inter-creditor agreement (ICA) has to be in place so that the majority of lenders are in agreement. Here the support has to come from 60 percent of the lenders by number and 75 percent of the outstanding debt in value. This would make the RP binding. Last, if the restructuring plan is above Rs 100 crore, there has to be an independent credit evaluation of the plan by 1 credit rating agency which becomes 2 in case of exposures of above Rs 500 crore. Further, A RP which does not involve restructuring/change in ownership shall be deemed to be implemented only if the borrower is not in default with any of the lenders as on 180th day from the end of the Review Period. Any subsequent default after the 180 day period shall be treated as a fresh default, triggering a fresh review.

Representational image. Reuters.

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In scope, the new guidelines are similar to the earlier one of 12 February 2018, except that it does not make it mandatory for the unresolved cases to be taken to the IBC. In the earlier scenario which was struck down by the Supreme Court, the companies risked losing their assets once in the NCLT process. Here it is not automatic and it is left to the lenders to do so if they agree upon the same.

The RBI has also mentioned the additional provisions that have to be made in case the RPs are not implemented within the timelines stated. Further, it is clear that the existing cases under IBC would not be affected as it is clearly mentioned that this framework shall not be available for borrower entities in respect of which specific instructions have already been issued or are issued by the Reserve Bank to the banks for initiation of insolvency proceedings under the IBC. Lenders shall pursue such cases as per the specific instructions issued to them. Also the earlier schemes such as Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR) etc. stand withdrawn.

How would this work? These guidelines will definitely bring in more transparency in terms of letting all the lenders know that there is a problem and that they would also have to work towards a solution through the RP. But the onus is on the set of creditors to come together and take a call on the resolution plan which could mean a restructuring of the loan or arguing for a change in ownership, both of which can be contentious.

Even in the past, such arrangements have been there in different forms wherein the creditors could get together and restructure the debt in different ways. But the tricky part was when the asset had to be sold which meant pricing of the deal that involved haircuts that were not acceptable to the two parties – banks wanted smaller cuts while the buyer larger ones. That is why the ARC concept did not quite take off. Also, there was the case of banks deliberately procrastinating on the resolution so as to ensure that these assets were not taken to be NPAs and hence the evergreening incentive was rampant.

It would be interesting to see how this pans out. Bankers are certainly more cognizant of disclosing their NPAs after the AQR process was initiated a couple of years back. Further, all the major legacy issues are already in the process and cannot be reversed. It would hold for the new NPAs which come up that will be easier to monitor. Therefore it does seem that banks will respond more responsibly this time and not kick the can which was done earlier.

(The writer is chief economist, CARE ratings)