Financial & Insolvency Law

RBI Overhauls its NPA Regime: IBC to Hold the Fort? [Part II: RBI’s Outgoing NPA Regime]

RBI has played an active role in combatting the growing NPAs that have plagued the nation. Before assessing the contours of the new regime, it is necessary to understand the former. Some of the tools employed under RBI’s erstwhile regime are as follows:

[Part I of this series can be found here]

  1. Joint Lender’s Forum: The Joint Lender’s Forum is a dedicated grouping of lender banks that is formed to speed up decisions when an asset (loan) of Rs 100 crore or more turns out to be a stressed asset. RBI has issued guidelines for the formation of JLF in 2014 for the effective management of stressed assets[1]. The JLF has to initiate corrective actions when an account has the risk of becoming an NPA.
  2. Corporate Debt Restructuring: It is a scheme evolved by RBI through a circular issued on 23rd August, 2001 for implementation by banks and Financial Institutions (FIs) for realisation of amount of debt from the debtors who are not able to pay the amount in full[2]. It is based on a voluntary agreement between the debtor & creditor (DCA) or the creditor & creditor (ICA) wherein approval of 75% creditors i.e. Super Majority is required. It covers only multiple banking accounts and consortium or syndication of accounts where aggregate outstanding is Rs. 100 million[3].The objective of the CDR framework is to ensure a timely and transparent mechanism for restructuring of the corporate debts of viable corporate entities affected by internal or external factors, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned[4]. Through CDR, any secured creditor having a minimum of a 20% share in either the working capital or term finance or any concerned corporate supported by a bank or financial institution holding the previously mentioned stake can initiate the proceedings, irrespective of the status or “health’ of the account[5].Additionally, the scheme also stipulated for a moratorium period whereby both the parties would be constraining themselves from pursuing any other legal remedy where the CDR plan is being implemented[6].
  3. Strategic Debt Restructuring Scheme: SDR is a tool that is based on the principle of restructuring whereby the owners or rather the shareholder bears the loss first rather than the debt holder[7]. Therefore, RBI decided to empower the banks with an enhanced competency to initiate the change of ownership for those accounts that failed to reach the project viability milestone by converting their loans due into equity shares, but such restructuring needs to be sanctioned by necessary authorizations and approval like the special resolution passed by the shareholders[8]. There is a further requirement that 51% of the equity shareholding must be held by the lenders, post conversion[9]. In practice, SDR, due to its approach of “one size fits all” has proven to be an ineffective and impractical scheme that fails to furnish any substantial results owing to both an inapt framework along with mismanaged execution by the banks and financial institutions[10].
  4. Scheme for Sustainable Structuring of Stressed Assets (S4A): The S4A Scheme aims at deep financial restructuring of big debted projects by allowing lender (bank) to acquire equity of the stressed project. In this context, the scheme makes financial restructuring of large projects at the same time helping the lender’s ability to deal with such stressed assets[11]. It is intended to restore the flow of credit to critical sectors including infrastructure[12].
  5. Framework for Revitalising Distressed Assets in the Economy: As guidelines for the JLF procedure, the framework sought to set out a Corrective Action Plan (CAP) that would incentivize early identification of stress in the form of Special Mention Accounts (SMA) timely restructuring of accounts which may be considered viable, and necessitating prompt action by banks for recovery or sale (as the case may be) of unviable accounts. The focus thus stood heavily upon the role of bankers in order to regulate the proceedings of the JFL to combat inaction. This framework itself was riddled with its own issues, firstly, this framework thrust the lenders into JLF proceedings in a sort of shoot first, ask questions later manner where they were at the mercy of other lenders to come to agreement on the CAP. Secondly, the framework fails to clarify whether an Inter Creditor Agreement (ICA) is mandatory or even the consequence of not being able to formulate a restructuring package. On the whole, though this framework was intended as a means of adequately monitor loan accounts, it only marred the same process.
  6. Flexible Structuring of Existing Long-Term Project Loans: Also known as the 5:25 scheme aimed at the infrastructure and Core Industries sector, the banks were allowed to fix a longer amortization period of say 25 years to projects in the eligible industries, based on the analysis of the economic life or concession period of the project with periodic refinancing, say every 5 years. The repayment at the end of each refinancing period would be structured as a bullet repayment, with the intent specified upfront that it will be refinanced. Though it brought substantial advantages to the borrowers, it did bring about potential disadvantages for the lender. Overall, this scheme had a positive impact[13].

Though there were many frameworks and guidelines implemented within RBI’s outgoing NPA regime, where it lost the bout was in creating cacophony between the different frameworks that were non-synchronous in various key forms. Further, the provisions were many a times incomplete and necessary changes many a times came as an after-thought. The united effect of the outgoing framework was to create a rigid framework that failed the very purpose that it had set out to achieve and that was exploited by the borrowers and lenders both.

Another substantial aspect in which the previous NPA regime lacked was in ensuring certainty of process. In resolving NPAs the certainty of resolution is equally if not more important than stringency of provisions. Lack of certainty of process created a lacuna in the past  NPA regime that was again exploited by borrowers. There were various other factors as well that had marred the effectiveness of the fight against NPAs in the previous regime.

This rigidity and lack of certainty of process are what the new NPA framework has set out to tackle under the new NPA regime.

[1]Framework for Revitalising Distressed Assets in the Economy, RBI Notification (30.01.2018).

[2]Deepika Shukla, Brief Overview of Corporate Debt Restructuring, Taxguru (24.01.2018), https://taxguru.in/rbi/brief-overview-corporate-debt-restructuring-cdr.html.

[3]Revised Guidelines on Corporate Debt Restructuring (CDR) Mechanism, RBI Circular (05.02.2005).

[4]Reserve Bank of India Notification, Corporate Debt Restructuring, RBI notification (23.08.2001).

[5]Id., ¶ 4.1.4.

[6]Framework for Revitalising Distressed Assets in the Economy – Guideline on the Joint Lender’s Forum and Corrective Action Plan, RBI Notification (26.02. 2014).

[7]Id.

[8]Strategic Debt Restructuring Scheme, RBI Notification (08.06.2015).

[9]Id., ¶ 3(v).

[10]Anand Adhikari, Why RBI’s strategic debt restructuring scheme has turned out to be a damp squib, Business Today (29thJanuary, 2017), https://www.businesstoday.in/magazine/buzztop/buzztop-feature/rbi-one-size-fits-all-strategic-debt-restructuring-scheme-is-turning-out-to-be-a-damp-squib/story/243750.html.

[11]Scheme for Sustainable Structuring of Stressed Assets, RBI Notification (13.06.2016).

[12]Tojo Jose, What is the Scheme for Sustainable Structuring of Stressed Assets (S4A)?, Indian Economy (28thFebruary, 2018), https://www.indianeconomy.net/splclassroom/what-is-scheme-for-sustainable-structuring-of-stressed-assets-s4a/.

[13]CARE Ratings, 5:25 Flexible Structuring Scheme: Aligning Benefits, https://bit.ly/2BZv77L.


This Article is a part of an authoritative series of which other parts are available as under – 

Part I: Introduction

Part II: RBI’s Outgoing NPA Regime

Part III: RBI’s First Attempt at an IBC backed NPA Resolution Framework and the 12 Mega-Defaulters

Part IV: Understanding RBI’s New NPA Regime

Part V: The Impact and Criticism of RBI’s New NPA Regime

Siddharth is the Founder of CorpLexia and serves as its Editor. He is a student of BBA LL.B (Hons.) and has a special focus on corporate, commercial, insolvency, arbitration, securities and competition laws. He can be reached at siddharth@corplexia.com

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