Review of Prudential Guidelines - Revitalising Stressed Assets in the Economy

 

Part A - SDR Scheme

It is reiterated that the trigger for SDR  must be non-achievement of viability milestones and /or non-adherence to ‘critical conditions’ linked to the option of invoking SDR, as stipulated in restructuring agreement, and SDR cannot be triggered for any other reason.

RBI advises that JLF will have the option to initiate SDR to effect change of management of the borrower company in cases of failure of rectification or restructuring as a CAP as decided by JLF, subject to compliance with the stipulated conditions. RBI advises that necessary covenants in the documents should also be part of rectification arrangement.

RBI prescribes that the ‘new promoter’ should not be a person/entity/subsidiary/associate etc., from the existing promoter/promoter group.

Banks should explore the possibility of preparing a panel of management firms/individuals having expertise in running firms/companies who could be considered for managing the companies till ownership is transferred to the new promoters. Banks may consult IBA and other industry bodies in this regard.

The current management should not be allowed to continue without the representatives of banks on the Board of the company and without supervision by an entity/person appointed by the banks.

Personal guarantees from existing promoters should cover losses incurred by lenders. Banks should therefore devise a mechanism towards invocation of these guarantees. Personal guarantees should be released only after transfer of ownership / management control to the new promoters.

The asset classification benefit will be available to the lenders provided they divest a minimum of 26% of the shares of the company (and not necessarily 51% as required earlier) to the new promoters within the stipulated time line of 18 months and the new promoters take over management control of the company. Lenders should, however, grant the new promoters the ‘Right of First Refusal’ for the subsequent divestment of their remaining stake.

JLF can have flexibility in the time taken for completion of conversion of debt into equity in favour of lenders (i.e. up to 210 days from the review of achievement of milestones/critical conditions). The benefit of ‘stand-still’ in asset classification will apply from the reference date itself. However, if the targeted conversion does not take place within 210 days, the benefit will cease to exist.

Banks should periodically value and provide for depreciation of these equity shares as per IRAC norms for investment portfolio. Banks will, however, have the option of distributing the depreciation, over four calendar quarters from the date of conversion. Furthermore, banks desiring to have a longer period for making provisions, say 6 quarters, can start making ex-ante provisions in anticipation of Mark To Market requirement, from the reference date itself.

It is possible that the lenders may not be able to sell their stake to new promoters within the 18 month period, thus revoking the 'stand-still' benefit of asset classification.

·       Banks should therefore build provisions such that, by the end of the 18 month period, they hold provision of at least 15 per cent of the residual loan.

·       The required provision should be made in equal instalments over the four quarters.

·       This provision shall be reversed only when all the outstanding loans/facilities in the account perform satisfactorily during the ‘specified period’ after transfer to new promoters.

The guidelines contained in paragraph 3 and 6 will also be applicable to cases where change in ownership has been carried out under the Prudential Norms on Change in Ownership of Borrowing Entities (Outside SDR Scheme).

It is clarified that the SDR framework will also be available to an ARC, which is a member of the JLF undertaking SDR of a borrower company.

Banks should strictly adhere to the provisioning of diminution in fair value as prescribed under SDR framework. If banks partially write off the existing loan which is being refinanced, the above mentioned provision will be net of the amount written off.

Part B - Framework to Revitalise the Distressed Assets in the Economy Joint Lenders’ Forum Empowered Group (JLF – EG)

In terms of the extant guidelines, the decisions on the CAP must be approved by a minimum of 75% of creditors by value and 60% of creditors by number in the JLF. On a review, the proportion of lenders, by number, required for approving the CAP has been reduced to 50%.

It is advised that approval of JLF-EG is mandatory only in cases of rectification with additional finance and cases of restructuring under a CAP.

It has been decided to modify the composition of JLF-EG as under:

a.     The top two banks in the system, in terms of advances, namely SBI and ICICI Bank, will continue to be permanent members of JLF EG.

b.    If SBI and ICICI Bank are the lenders in a JLF, the JLF-EG would consist of these two banks, the three lenders (other than ICICI Bank and SBI) having largest exposures to the borrower and the two largest banks in terms of advances¹ which do not have any exposure to the borrower.

c.     If either of SBI or ICICI bank is a lender, the JLF-EG would consist of these two banks, the four lenders (other than ICICI Bank and SBI) having largest exposures to the borrower and the next largest bank in terms of advances² which does not have any exposure to the borrower.

d.    If neither SBI nor ICICI Bank are the lenders in a JLF, then the JLF-EG would consist of these two banks and the five lenders having largest exposures to the borrower.

e.     All the JLF-EG members would have equal voting rights irrespective of size of exposure to the borrower.

The exiting lender will not have the option to continue with their                                                                                                            existing exposure and simultaneously not agreeing for rectification or restructuring as CAP.

If the dissenting lender is not able to exit by arranging a buyer within the prescribed time, it has to necessarily adhere to the agreed CAP and provide additional finance, if the CAP so envisages.

It has been decided to put in place an incentive structure for banks to communicate their decision on the agreed CAP in a time bound manner. Accordingly, asset classification and provisioning norms prescribed in the Appendix shall apply to different categories of lenders where the CAP has been agreed by majority members of JLF.

Instalments of the additional funding which fall due for repayment will have priority over the repayment obligations of the existing debt.

Part C- Prudential Guidelines on Restructuring of Advances

The accounts classified as 'standard assets' should be immediately re-classified as 'sub-standard assets' upon restructuring. Any additional finance may be treated as 'standard asset' during the specified period under the approved restructuring package.

It has been decided that in cases of fraud/malfeasance where the existing promoters are replaced by new promoters, banks and JLF may take a view on restructuring of such accounts based on their viability, without prejudice to the continuance of criminal action against the erstwhile promoters/management. Further, such accounts may also be eligible for asset classification benefits available on refinancing after change in ownership.

Restructured accounts classified as non-performing assets, when upgraded to standard category will attract a provision of 5 percent in the first year from the date of upgradation.

General Conditions

Instructions on ‘Special Regulatory Treatment for Asset Classification’ as contained in Part B of Master Circular DBR.No.BP.BC.2/21.04.048/2015-16 dated

July 1, 2015 on “Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’ stand withdrawn.

i.                All restructuring packages under CDR/JLF/Consortium/MBA arrangement should be implemented within 90 days from the date of approval. Other restructuring packages should be implemented within 120 days from the date of receipt of application by the bank.

ii.              Additional funds brought by promoters should be a minimum of 20% of banks’ sacrifice or 2% of the restructured debt, whichever is higher.

The promoters’ contribution should invariably be brought upfront. Promoter’s contribution need not necessarily be brought in cash and can be brought in the form of conversion of unsecured loan from the promoters into equity;

iii.            Banks should determine a reasonable time period during which the account is likely to become viable, based on the cash flow and the Techno Economic Viability (TEV) study;

iv.            Banks should be satisfied that the post restructuring repayment period is reasonable, and commensurate with the estimated cash flows and required DSCR in the account.

v.    Each bank should clearly document its own due diligence done in assessing the TEV and the viability of the assumptions underlying the restructured repayment terms.

Part D - Flexible Structuring of Project Loans

We have been receiving queries from banks as to whether banks can flexibly structure project loans availed in foreign currency. It is clarified that guidelines contained in DBOD.No.BP.BC.24/ 21.04.132/2014-15 dated July 15, 2014 and DBR.No.BP.BC.53/21.04.132/2014-15 dated December 15, 2014 on ‘Flexible  Structuring  of  Long  Term  Project  Loans  to  Infrastructure  and  Core

Industries’ are also applicable to external commercial borrowings (ECBs) availed for funding projects in infrastructure and core industries sectors subject to FEMA regulations.

Part E- Sale of financial assets to securitisation company (RC)/ reconstruction company (RC)

Reserve Price - Banks shall disclose the Reserve Price at the time of inviting bids/expression of interest from the SCs/RCs.

Due Diligence – Banks shall provide not less than 2 weeks for submission of bids from the time of inviting bids/expression of interest from SCs/RCs.

Treatment of security receipts/pass through a certificate post realization period –It has been decided that security receipts/pass through certificates which are not redeemed as at the end of the resolution period (i.e., five years or eight years as the case may be) will be treated as a loss asset in the books of the banks.

Lender Cat	Description	Asset Classification	Provisioning
A	Agreed to CAP and also conveyed final approval within the stipulated period	As per the extant norms	As per the extant norms
B	Agreed to CAP, but  conveyed  final approval and signed off the detailed final CAP after the stipulated period but within prescribed  implementation period.	Lowest Asset classification of the borrower among all the JLF lenders	A penal provisioning of 10% in addition to applicable  provisioning  as  per  Lowest  asset classification, for one year from the date of sign off of CAP.
C	Agreed to CAP, but failed to convey final approval and sign off within prescribed implementation period.	Lowest asset classification of the borrower among all the JLF Lenders	A penal provisioning of 15% in addition to applicable provisioning as per lowest asset classification for one year from the date of sign off of CAP. The lender has to compulsorily abide by the terms of the approved CAP.

Based on RBI Circular dt 25/02/16. Please visit www.rbi.org.in for any further clarification if required….. Poppy