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Resolution Of Stressed Assets – Revised Framework

The new framework also significantly increases reporting requirements for banks

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Recently, the Reserve Bank of India (RBI) introduced the 'Resolution of Stressed Assets - Revised Framework', replacing the regime of voluntary restructuring for Indian banks. Since restructuring had become the default go-to option for banks and defaulting borrowers, this move, which puts banks under very stringent disclosure and deadline schedules, has created a significant stir in the market. Under the new framework, the RBI has primarily focussed on NPAs of the borrowers where the total banking loan exposure exceeds Rs 2000 crores. Banks are now required to resolve the defaults in all such accounts (whether through curing non-payment or restructuring) within a period of six months, failing which they have to mandatorily refer the borrower to the National Company Law Tribunal (NCLT) for corporate insolvency under the Insolvency and Bankruptcy Code 2016 (Insolvency Code). This is the first phase of the RBI's policy for resolving defaults in high value accounts, and it has already clarified that it will soon extend the policy to all accounts having an exposure of Rs 100 crore and above as well.

While the previous schemes have been withdrawn, the RBI has not actually done away with restructuring. The new framework also permits banks to restructure an account within six months of default, which can still be by way of conversion of debt to equity, or following a transfer of control and promoter stake-holding in the borrower. The new restructuring norms are in many ways a condensed version of the SDR, outside SDR and S4A schemes of the past, with more relaxed parameters as to the extent of equity conversion. However, they differ from the previous schemes in two very fundamental ways.

Firstly, the restructuring attempts are very tightly time bound. While all previous restructuring schemes were also required to be implemented within well defined timeframes, the consequence of overshooting the deadline required the bank to adopt higher provisioning norms. For the borrower itself, a delay meant precious little. However, under the new framework, the banks have to compulsorily take the borrower to the NCLT and initiate insolvency proceedings. Thus, both the lenders and the borrower are under pressure to finalise and implement the resolution plan within a fairly short period of time.

Secondly, the new framework does not provide for a concept of a binding majority lenders' vote, either in line with the previous restructuring regime or in line with the IBC. A scheme of restructuring under the new framework could only be successful if 100% of the lenders agree to it. While the RBI's intent behind this is still unclear, it definitely makes approval of a resolution plan impractically difficult and offers any minority lender an option to stall or block a majority decision, where the stalemate can only be broken in the corporate insolvency resolution process.

A resolution plan with a 100% approval in any consortium setting is unrealistic, to say the least. Every scheme of restructuring up until now required the approval of only 75% of the lenders by voting share and 50% by number, while the Insolvency Code required a resolution plan to be approved by 75% of the lenders by voting share, in order to become binding on everybody else. Without a similar threshold in place, the high value accounts are practically bound to end up before the NCLT. It is difficult not to believe that this is the RBI's unstated intention. To begin with, the Insolvency Code provides each lender with an avenue to approach the NCLT from the very start. If a single one of them does so and the petition is admitted, the new restructuring norms and timelines become redundant. Also, the corporate insolvency resolution process under the Insolvency Code provides a final solution in respect of a borrower, restructuring does not. Several times, a fully implemented scheme did not ultimately result in the borrower's economic recovery, at most serving only to delay future defaults in respect of the restructured facilities. The six-month window to work out a resolution plan under the new framework will serve to provide an opportunity to rectify accounts which genuinely need a short period of time to clear overdues, but high value accounts requiring deep restructuring would almost inevitably end up before the NCLT.

The new framework also significantly increases reporting requirements for banks. While the new system of weekly disclosures of defaulted accounts above Rs 5 crore to CRILC ensures much greater transparency in the system, it has also significantly adds to compliance pressures on the banks.

There is also some confusion at present as to the status of accounts which were already undergoing restructuring. The new framework states that it would apply to all accounts where an earlier scheme of restructuring had been invoked but not implemented. However, given that earlier restructuring plans could be in indifferent phases of implementation (including conversion of debt to equity under SDR, Outside SDR or S4A schemes), this is a point on which banks may need more clarification from the RBI.

The policy itself is a sound one, because it is a fact that the Insolvency Code has in its short tenure enjoyed much greater success in resolving stressed accounts than any of the withdrawn restructuring schemes. The RBI's policy is a nod to the efficacy of the statutory process and its own preference to have that followed instead of a bank-led restructuring. While it will very likely be a challenge for the banks to implement the new policy within the decidedly tight timelines, once the teething phase has passed, the new policy should instil much greater levels of credit discipline across the board.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Kumar Saurabh Singh

The author is Partner, Khaitan & Co

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Rajeev Vidhani

The author is Associate Partner, Khaitan&Co

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