In the past, banks have played both victim and perpetrator under the scheme of the Joint Lenders Forum while they plead for more power to be vested them the in the forum, at the same time, the bank executives are the ones that have led the mismanagement of the accounts and have also engaged in underhanded deals that empower the creation and sustenance of the substantial NPAs as was revealed in the midst of various scandals like the Videocon, Nirav Modi, Mehul Choksiand Vijay Mallayascandals, that have been the cause of great national embarrassment and financial loss. RBI vide its Notification dated 12thFebruary 2018 had set a deadline of 27thAugust, 2018 for the banks to resolve stressed assets with outstanding dues of over RS 2,000 crore, failing which the accounts would have to be referred for insolvency proceedings. It is stringency that is the need of the hour, in the effective resolution of NPAs.
[Part III of this series can be found here]
Procedure Under the New Regime
The details of the revised framework and the major changes thereunder are elaborated as follows:
i. Early Identification and Reporting of Stress
RBI has stipulated for the lenders to begin the identification of stress in loan accounts immediately on default. A default has been defined as non-payment of the whole or any part of the debt which has become due and payable but has not been repaid by the debtor or the corporate debtor, following the definition under the Code.
An NPA has been defined as a period of 90 days from the default on full or part payment of the debt. Lenders have to classify the debt in the form of Special Mention Account (herein after referred to as “SMA”) in the period of 90 days from default (grouped on the basis of 3 successive sets of 30 days), as an early measure. A weekly report is to be submitted by lenders to the Central Repository of Information on Large Credits (herein after referred to as “CRILC”) of all the borrower entities in default with an aggregate exposure of 50 million rupees and above. Additionally, a Main Report has to be submitted with the CRILC reporting credit information including the bifurcation of the defaulting borrowers account into the three SMAs of the borrower entities having aggregate exposure of 50 million rupees and above.
ii. Implementation of the Resolution Plan
The lenders are directed to attempt to clear defaulted accounts by implementing a Resolution Plan before directing it for insolvency resolution procedure. The Resolution Plan may involve any actions/ plans/ reorganization to regularize the account by payment of all the overdue by the borrower, sale of the exposures, and change in the ownership or restructuring. The Notification stipulates strict guidelines for concluding the implementation of the conditions of the Resolution Plan that provides an objective standard that cannot be molded to suit oblique intentions.
iii. Restructuring Defined
The Notification covers any form of restructuring, irrespective of the framework of the Code. Under the Notification restructuring is defined as follows:
“Restructuring is an act in which a lender, for economic or legal reasons relating to the borrower’s financial difficulty grants concessions to the borrower. Restructuring would normally involve modification of terms of the advances/securities, which may include, among others, alteration of repayment period / repayable amount; roll over of credit facilities; sanction of additional credit facility; enhancement of existing credit limits and compromise settlements where time for payment of settlement amount exceeds three months.”
Therefore, the definition of restructuring includes almost any change that could be made to the first established contract of loan by the lenders in terms of easing the burden of the borrower. To this effect, the notification has repealed para 2 of the RBI Circular titled – ‘Framework for Revitalising Distressed Assets in the Economy – Refinancing of Project Loans, Sale of NPA and Other Regulatory Measures, 2014’ to ensure that any change regarding the repayment period of the existing projects without a pre-determined agreement with other banks should be treated as restructuring and places a limitation on the discretion of the bank to refinance the stressed assets.
iv. Timeline for Large Accounts to be Referred under IBC
The Notification stipulates that upon failure of the implementation of the Resolution Plan within 180 days of the default in respect of accounts with aggregate exposure of lenders at 20 million rupees and above, the lenders would be necessitated to file an application for insolvency under the Code (whether singly or jointly) within 15 days from the expiry of the timeline.
If there is any default in the repayment in the period between the implementation of the Resolution Plan and the repayment of 20% of the amount determined in the Resolution Plan, the lenders must make an application for insolvency against such an account. On the flip side, any default in payment after the expiry of this specified period shall be reckoned as a fresh default.
v. Classification of Assets
Prior to this notification, every account which has defaulted would get a grace time of up to 12 months before being degraded from the class of ‘Standard Asset’ to ‘Substandard Asset’ while under the new regime, where a borrower makes a default, the account would immediately be downgraded to a ‘Substandard Asset’. The only condition for the upgrade of classification is for the outstanding loan/ facilities in the account to demonstrate ‘satisfactory performance’.
vi. RBI’s supervision and review
RBI has stipulated for a strict supervisory position to ensure the purity of insolvency proceedings that are set out under the Notification and in the further course of insolvency proceedings initiated by all the scheduled commercial banks and All India Financial Institutions. The intent of RBI behind assuming such a substantial position is to ensure that these defaulters of the due process of credit do not evade proceedings under the Code by colluding with officials of the lenders and to ensure that the lenders do not fail in executing their duties, for any other reason. The relevant provisions are as follows:
“15. Any failure on the part of lenders in meeting the prescribed timelines or any actions by lenders with an intent to conceal the actual status of accounts or evergreen the stressed accounts, will be subjected to stringent supervisory / enforcement actions as deemed appropriate by the Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary penalties.”
Therefore, RBI is acting pragmatically in order to ensure that abuse of process does not stifle the object that is sought to be achieved by way of this Notification, that is, the successful resolution of stressed accounts in the economy. The provision is worded in a manner so as to ensure that any and all actions by the lenders, whether active or passive, that have the effect of failing the object of the Notification be met with stringent and certain reprimand. It is expedient to note that one of the biggest negative aspects of the past regime of the RBI was the ‘evergreening of stressed assets’, the same today is met with RBI’s stringent supervision and sanction. Further, Banks are obligated to make detailed disclosures in their financial statements relating to the Resolution Plans implemented.
vii. Prudential Norms and the Resolution Plans
In the Annexure 1 to the Notification, RBI has set out detailed prudential norms that would guide both the resolution plans pursued before or after the application for insolvency under the Code by the lenders. The requirements relating to asset classification, conditions for upgrade, provisions as to change of ownership, and other such principles are to be followed in either resolution plans. Through these norms, RBI seeks to clarify the ancillary procedure that surrounds the treatment and efficacy of proceedings both before and after the intervention of the Code.
viii. Regulatory Exemptions
Under Part IV of Annexure 1 to the Notification, RBI has laid out certain statutory exemptions to be availed by the entities undergoing proceedings under this Notification. Under the RBI Regulations, the acquisition of non-SLR securities by way of conversion of debt is exempted from the restrictions and the prudential limit in unlisted non-SLR securities prescribed by the RBI. Further, the acquisition of shares due to conversion of debt to equity during a restructuring process will be exempted from the regulatory ceilings and other restrictions.
Various exemptions have also been provided to the proceedings under the Notification under the ICDR and SAST Regulations of the Securities and Exchange Board of India (SEBI).
Why the Insolvency Code?
The regime under the Code represents a holistic and efficacious approach to what is essentially an inevitable truth of industry, insolvency. The remedy under the Code is based on establishing stringent substantive provisions along with a clear-cut procedure for initiating insolvency resolution proceedings against the stipulated debtor. While the past regime failed in ensuring the certainty of resolution, a factor that hold no less importance compared to the stringency of laws; the Code ensures that the cause of the creditor is not lost to the axe of procedural delays and inability. Another stipulation that ensures the efficacy and stability of the insolvency proceedings is the creation of the Insolvency and Bankruptcy Board of India (for brevity, the “Board”), that is essentially, the regulator of the Indian insolvency process. The Board plays a role in the facilitation of the insolvency proceedings, all of which, go on to serve the adjudication by the adjudicating authority under the Code.
As is clear from the stipulation of Section 12 of the Code, time is of the essence under the Code. The timely resolution process is a breath of fresh air into a system that was marred by years of litigation and resolution that would yield disappointing results owing to the time sensitive nature of the exercise that was always ignored which, in the ultimate analysis, has caused substantial losses and most importantly, the loss of investor confidence.
This Article is a part of an authoritative series of which other parts are available as under –
Sandeep Singh and Krishn Kaushik, Videocon gets Rs 3250-crore loan from ICICI Bank, bank CEO’s husband gets sweet deal from Venugopal Dhoot, The Indian Express (31stMarch, 2018; 06:59 AM), https://indianexpress.com/article/business/banking-and-finance/videocon-gets-rs-3250-cr-loan-from-icici-bank-chanda-kochhars-husband-gets-sweet-deal-from-venugopal-dhoot-5115267/.
Press Trust of India, PNB fraud case: Govt initiates action for removal of Allahabad Bank CEO Usha Ananthasubramanian, 2 PNB directors; board to meet today, First Post (15thMay, 2018; 08:29 AM), https://www.firstpost.com/business/pnb-fraud-case-govt-initiates-action-for-removal-of-allahabad-ceo-2-pnb-directors-board-to-meet-today-4469529.html.
Meetu Jain; Mehul Choksi firms paid bribes to PNB officials, CBI files charge sheet; Business Today (3rdAugust, 2018; 10:26 PM); https://www.businesstoday.in/current/economy-politics/mehul-choksi-pnb-fraud-cbi-charge-sheet/story/277117.html.
Devesh K. Pandey, Ex-IDBI Bank chief, 8 others held in Kingfisher loan case, The Hindu (8thof July, 2017 4:46 PM), https://www.thehindu.com/news/national/vijay-mallya-loan-default-case-ex-idbi-bank-chairman-among-8-arrested/article17082954.ece.
Agencies, Banks rush to resolve large bad loans as deadline looms, The Free Press journal (August 18, 2018; 12:58 AM), http://www.freepressjournal.in/business/banks-rush-to-resolve-large-bad-loans-as-deadline-looms/1337677.
Resolution of Stressed Assets – Revised Framework, RBI Notification (12.02.2018), ¶ 2-3.
The Insolvency and Bankruptcy Code, Act No. 31 of 2016, § 3(12) (2016).
Prudential Norms on Income recognition, Asset Classification and Provisioning pertaining to the Advances Portfolio, RBI Master Circular (30.08.2001), ¶ 2.1.3.
SupraNote 2, ¶ 4.
SupraNote 2, ¶ 5.
SupraNote 2, ¶ 4.
SupraNote 2, ¶ 8-13.
SupraNote 2, ¶ 9.
SupraNote 2, ¶ 10.
SupraNote 2, ¶ 11.
SupraNote 2, ¶ 2 of Annexure 1.
SupraNote 2, ¶ 3 of Annexure 1.
SupraNote 2, ¶ 15 & 16.
SupraNote 2, ¶ 16.
SupraNote 2, Annexure 1, ¶ 19.
SupraNote 2, Annexure 1, ¶ 20.
SupraNote 2, Annexure 1, ¶ 21-25.
Banking Law Reforms Committee Report, 2015.