Introduction:
The Apex bank of India issued a new circular on Non Performing Assets (hereinafter ‘NPA’) namely Reserve Bank of India (Prudential Framework for Resolution of Stressed Assets) Directions 2019. The said circular was issued on 7th June 2019. These New guidelines stand in replacement of all previous models. This circular came in light of the decision of Hon’ble Supreme Court of India in April this year quashing RBI circular dated 12th February 2018. The previous circular was quashed by the Supreme Court after several companies raised issue of insufficient time to tackle the problem of Bad Debt. The new framework is issued to facilitate early recognition; reporting and time-bound resolution of stressed assets.
Date of enforcement:
The new circular shall come into force with immediate effect i.e. from 7th June 2019.
Withdrawal by new Circular:
The new circular withdraws the following-
Corporate Debt Restructuring Scheme.
Strategic Debt Restricting Scheme.
Joint Lender’s Forum as a mandatory institutional mechanism for resolution of stressed assets.
Scheme for sustainable structuring of stressed assets.
Change in ownership outside SDR.
Framework for revitalizing distressed assets.
Flexible structuring of existing long term project loans.
What is sought to be done under a new Circular?
• Recognition and classification of default: New norms provide for immediate recognition of NPAs and to classify such assets as Special Mention Account with further classification as
SMA-0 where the amount is due for 1 to 30 days.
SMA-1 where the amount is due for 31 to 60 days.
SMA-2 where the amount is due for 61 to 90 days.
Where there is a case of revolving credit facilities like cash credit, Special mention account is to be classified as under-
SMA-1 where an outstanding balance remains due for 31 to 60 days.
SMA-2 where an outstanding balance remains due for 61 to 90 days.
The quashed guidelines mandated lenders to start resolution even on one day default.
• Weekly report: lenders shall submit a weekly report of defaults by borrowers with aggregate exposure of 5 crores or more.
• Credit information: Credit information, of all borrowers having aggregate exposure of 5 crores or more, is required to be reported by lenders.
• Inter-creditor agreement: all lenders shall enter into an inter creditor’s agreement pursuant to the implementation of the resolution plan. This agreement shall provide for detailed guidelines for finalization and implementation of the resolution plan. This ICA shall provide for the decisions agreed by lenders representing 75% of value of total outstanding facilities and 60% of lenders in number. This decision shall be binding on all lenders.
What in resolution plan?
The resolution plan shall not provide for payment less then liquidation value. The resolution plan should be clearly documented. The resolution plan is to be implemented under 180 days after the review period. The review period under new norms is of 30 days from default. This review period is given to decide resolution strategy including the nature of resolution plan, the approach of implementation of resolution plan, etc. The lenders are given an option to choose to initiate legal proceedings for insolvency and recovery.
Underway resolution plan on the date of circular may be pursued by lenders subject to special conditions.
Is this New Framework available to every borrower?
This New framework is available to borrowers except of those to whom instructions have been issued under Insolvency and Bankruptcy Code. Here instructions mean specific instructions to initiate insolvency proceedings under IBC. Borrowers who have committed default or indulged in fraudulent activities are not given restructuring option in new circular.
Conclusion:
The problem of NPA was being talked about by RBI for a long period of time. Several circulars, models have been issued with a detailed framework to solve this problem. This is considered to be a prudent step from the lenders point of view. New norms flame expectations from lenders to initiate the process of implementing resolution plan even before default. This prudent framework is expected to solve the problem of NPA prudently and to give a big push to economic growth.
