Resolution of
Stressed Assets – Revised Framework
It has been
decided to substitute the existing guidelines on resolution of stressed assets with
a simplified framework. Hence, instructions on the Framework for Revitalising
Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of
Existing Long Term Project Loans, SDR, Change in Ownership outside SDR, and S4A
stand withdrawn
I. Revised
Framework
The revised
framework consists of five segments
A. Early
identification and reporting of stress
Lenders shall
identify incipient stress, immediately on default, by classifying these
accounts as SMA as per the following categories:
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Categories
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Overdue Period
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SMA-0
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1-30 days
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SMA-1
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31-60 days
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SMA-2
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61-90 days
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The CRILC-Main
Report will be submitted monthly from April 1, 2018. Lenders shall also report
to CRILC, all borrower entities in default with an exposure of Rs 5 cr and
above, on a weekly basis, every Friday. The first such weekly report shall be
submitted on February 23, 2018.
B. Implementation
of Resolution Plan
All lenders must
put in place Board-approved policies for resolution. As soon as there is a
default with any lender, all lenders − singly or jointly − shall initiate steps
to cure the default. The resolution plan may involve any action including but not
limited to, regularisation of the account by payment of over dues, sale of the
exposures, change in ownership, or restructuring. The RP should be clearly
documented by all the lenders.
C. Implementation
Conditions for Resolution Plan
A RP in respect of
borrowers where lenders continue to have credit exposure, shall be deemed to be
‘implemented’ only if the following conditions are met:
a. the borrower entity
is no longer in default with any of the lenders;
b. if the
resolution involves restructuring; then
i.
all documentations, are completed by all lenders;
and
ii.
the new capital structure and changes in the terms
of conditions get reflected in the books of all the lenders and the borrower.
6. RPs involving
restructuring or change in ownership in accounts of ₹ 100 cr and above, shall require independent credit
evaluation (ICE) of the residual debt by credit rating agencies (CRAs)
specifically authorised by RBI for this purpose. Accounts with aggregate
exposure of ₹ 500 cr and above shall require two such ratings. Only such RPs which
receive a credit opinion of RP4 or better, shall be considered for
implementation. ICEs shall be subject to the following:
a.
The CRAs shall be directly engaged by the lenders
and the payment of fee shall be made by them.
b.
If lenders obtain ICE from more than the required
number of CRAs, all such opinions should be rated RP4 or better for the RP to
be considered for implementation.
D. Timelines for
Large Accounts to be Referred under IBC
·
Accounts with aggregate exposure of ₹ 2000 Cr and above, on or after March 1, 2018 which is the ‘reference date’,
·
Accounts where resolution may have been initiated
under any of the existing schemes
·
Accounts classified as restructured standard assets
which are currently in specified periods (as per the previous guidelines),
RP shall be
implemented in all the above cases as per the following timelines:
i.
If in default as on the reference date, then 180
days from the reference date.
ii.
If in default after the reference date, then 180
days from the date of first such default.
If a RP is not
implemented, lenders shall file insolvency application, singly or jointly within
15 days from the expiry of the said timeline.
Where a RP is
implemented within the 180-day period, the account should not be in default at
any point of time during the ‘specified period’. Failing this the lenders shall
file an insolvency application, singly or jointly, under the IBC within 15 days
from the date of such default.
‘Specified period’
here means the period from the date of implementation of RP till the date by
which at least 20% of the principal debt as per the RP and interest
capitalisation sanctioned as part of the restructuring, if any, is repaid.
However the
specified period cannot end before one year from the commencement of the first
payment of interest or principal (whichever is later) on the credit facility
with longest period of moratorium under the terms of RP.
Any default in
payment after the expiry of the specified period shall be reckoned as a fresh
default.
For accounts with
aggregate exposure of Rs. 100 cr and above but below Rs. 2000 cr, the Reserve
Bank intends to announce, over a two-year period, reference dates for
implementing the RP.
These transition
arrangements shall not be available for entities where specific instructions
have already been issued by the Reserve Bank for reference under IBC.
E. Prudential
Norms
The revised
prudential norms applicable to any restructuring are contained in Annex-1. The provisioning
in respect of exposure to entities against whom insolvency applications are
filed shall be as per their asset classification in terms of the guidelines on Prudential
norms on Income Recognition, Asset Classification and Provisioning.
II. Supervisory
Review
Any failure on the
part of lenders in meeting the prescribed timelines or any actions with intent
to conceal the actual status of accounts will be subjected to stringent actions
like higher provisioning, monetary penalties, etc.
III. Disclosures
Banks shall make
appropriate disclosures in their financial statements, under ‘Notes on
Accounts’, relating to resolution plans implemented.
IV. Exceptions
Restructuring in
respect of projects under implementation involving deferment of date of
commencement of commercial operations, shall continue to be covered under the
guidelines on ‘Prudential norms on Income Recognition, Asset
Classification and Provisioning pertaining’.
Annex – 1
Norms Applicable
to Restructuring
Restructuring
would normally involve modification of terms of advances or securities, which
would generally include, alteration of repayment period / repayable amount /
the amount of instalments / rate of interest / roll over of credit facilities /
sanction of additional credit facility / enhancement of existing credit limits
/ compromise settlements where time for payment of settlement amount exceeds
three months.
I. Prudential
Norms
A. Asset
Classification
In case of
restructuring,
·
Accounts classified as 'standard' shall be
immediately downgraded as NPA.
·
The NPAs would continue to have the same asset
classification as prior to restructuring.
In both cases, the asset classification shall continue to be governed by
the ageing criteria as per the current asset classification norms.
B. Conditions for
Upgrade
Restructured
accounts may be upgraded only when the payments are not in default at any point
of time during the ‘specified period’ ( satisfactory performance) .
Where the
aggregate exposure is ₹ 100 cr and above, in addition to demonstrating satisfactory performance,
the credit facilities should also be rated as BBB- or better at the end of the
‘specified period’. While accounts with aggregate exposure of ₹ 500 Cr and above shall require two ratings, those below ₹ 500 Cr shall require one rating. If the ratings are obtained from more
than the required number of CRAs, all such ratings should be BBB- or better.
In case the
account does not display satisfactory performance during the specified period,
the account shall be reclassified as per the repayment schedule that existed
before the restructuring. Any future upgrade for such accounts shall be
contingent on implementation of a fresh RP and demonstration of satisfactory
performance thereafter.
C. Provisioning
Norms
Accounts
restructured under the revised framework shall attract provisioning as per existing
RBI guidelines. However, the provisions made in accounts restructured before
the date of this circular shall continue to be held as per the requirements
specified in the respective scheme.
D. Additional
Finance
Any additional
finance approved under the RP may be treated as 'standard asset' during the
specified period, provided the account performs satisfactorily. If the restructured
asset fails to perform satisfactorily during the specified period or does not
qualify for upgradation, the additional finance shall be placed in the same
asset classification category as the restructured debt.
E. Income
recognition norms
Interest income in
respect of restructured accounts classified as 'standard assets' may be
recognized on accrual basis and in accounts classified as 'non-performing
assets' shall be recognised on cash basis.
In the case of
additional finance in accounts where the pre-restructuring facilities were
classified as NPA, the interest income shall be recognised only on cash basis
except when the restructuring is accompanied by a change in ownership.
F. Conversion of
Principal into Debt or Equity and Unpaid Interest into 'Funded Interest Term
Loan' (FITL), Debt or Equity Instruments
The FITL, debt or equity
instruments created by conversion of part of principal or unpaid interest, will
be placed in the same asset classification category in which the restructured
advance has been classified.
These instruments
shall be valued as per usual valuation norms and marked to market. Equity
instruments, whether classified as standard or NPA, shall be valued at market
value, if quoted, or else at break-up value (without considering the
revaluation reserve, if any) as ascertained from the company's balance sheet as
on March 31st of the immediate preceding financial year.
In case balance
sheet as on March 31st of the immediate preceding financial year is not
available, the entire portfolio of equity shares shall be valued at Re.1.
Depreciation on these instruments shall not be offset against the appreciation
in any other securities held under the AFS ( Available for sale) category.
The unrealised
income represented by FITL, Debt or equity instrument can only be recognised in
the profit and loss account as under:
a.
FITL/debt instruments: only on sale or redemption,
as the case may be;
b.
Unquoted or quoted equity classified as NPA: only
on sale;
c.
Quoted equity classified as standard: market value
of the equity as on the date of upgradation, not exceeding the amount of
unrealised income converted to such equity. Subsequent changes to value will be
dealt as per the current prudential norms.
G. Change in
Ownership
In case of change
in ownership of the entities, its credit facilities may be continued or upgraded
as ‘standard’ asset after the change in implemented under IBC or this framework.
If the change is implemented under this framework, then the classification as
‘standard, shall be subject to the following conditions:
i.
Banks shall conduct necessary due diligence and
clearly establish that the acquirer is not a person disqualified in terms of
Section 29A of IBC.
ii.
The new promoter shall have acquired at least 26 %
of the paid up equity capital and shall be the single largest shareholder.
iii.
The new promoter shall be in ‘control’ of the entity
as per the definition of ‘control’ in the Companies Act 2013, SEBI or any other applicable regulations and
accounting standards.
iv.
The conditions for implementation of RP are
complied with.
For accounts to
continue as standard, all the outstanding facilities need to demonstrate
satisfactory performance during the specified period. If the account fails to do
so at any point of time, the credit facilities shall be immediately downgraded
as non-performing assets (NPAs). Any future upgrade shall be contingent on
implementation of a fresh RP and
demonstration of satisfactory performance thereafter.
Provisions held in
such accounts as on the date of change in ownership can be reversed only after
satisfactory performance during the specified period.
II. Principles on
classification of sale and lease back transactions as restructuring
A sale and
leaseback transaction or transactions of similar nature will be treated as an
event of restructuring for the purpose of asset classification and provisioning
with regard to the residual debt of the seller as well as the debt of the buyer
if all the following conditions are met:
i.
The seller of the assets is in financial
difficulty;
ii.
More than 50 %, of the revenues of the buyer from
the specific asset is dependent upon the cash flows from the seller;
iii.
25 % or more of the loans availed by the buyer for
the purchase of the specific asset is funded by the lenders who already have a
credit exposure to the seller.
III. Prudential
Norms relating to Refinancing of Exposures to Borrowers in different currency
If foreign
currency borrowings or export advances for the purpose of repayment or refinancing
of rupee loans are obtained from:
a.
lenders who are part of Indian banking system; or
b.
with support from the Indian banking system in the
form of Guarantees, Standby Letters of Credit or Letters of Comfort, etc.,
such events shall
be treated as ‘restructuring’ if the borrower concerned is under financial
difficulty.
Similarly, rupee
loans for repayment or refinancing of foreign currency borrowings or export
advances will also be treated as ‘restructuring’ if such loans are extended to
a borrower who is under financial difficulty.
IV. Regulatory
Exemptions
Exemptions from
RBI Regulations
Acquiring non-SLR
securities by conversion of debt is exempted from the restrictions and the
prudential limit on investment in unlisted non-SLR securities prescribed by the
RBI.
Acquisition of
shares due to conversion of debt to equity during a restructuring process will
be exempted from regulatory ceilings or restrictions on Capital Market
Exposures, investment in Para-Banking activities and intra-group exposure.
However, these
will require reporting to RBI and disclosure in the Notes to Accounts in Annual
Financial Statements. Nonetheless, banks will have to comply with the
provisions of Section 19(2) of the Banking Regulation Act, 1949.
Exemptions from
Regulations of SEBI
With reference to SEBI
requirements, the issue price of the equity shall be the lower of (i) or (ii)
below:
i.
The average of the weekly high and low of the
volume weighted average price of the related equity shares quoted on the recognised
stock exchange during the twenty six weeks preceding the ‘reference date’ or the
two weeks preceding the ‘reference date’, whichever is lower; and
ii.
Book value: Book value per share is to be
calculated from the audited balance sheet as on March 31st of the immediate
preceding financial year adjusted for cash flows and financials post the
earlier restructuring, (without considering 'revaluation reserves'). In case
the audited balance sheet as on March 31st of the immediate preceding financial
year is not available the total book value of the borrower company shall be
reckoned at Re.1.
·
In the case of conversion of debt into equities,
the ‘reference date’ shall be the date on which the bank approves the
restructuring scheme.
·
In the case of conversion of convertible securities
into equities, the ‘reference date’ shall be the date on which the bank
approves the conversion of the convertible securities into equities.
·
In case of issuance of fresh shares to the new
promoter, the ‘reference date’ shall be the date of signing of the
binding agreement between the bank and the new promoter.
With reference to
the requirements at the time of selling the equity instruments in favour of a
new promoter, the selling price may be a negotiated price. However, the selling
price shall not be lower than the ‘fair value’, which shall be the higher of
(i) and (ii) below:
i.
The average of the weekly high and low of the
volume weighted average price of the related equity shares quoted on the
recognised stock exchange during the twenty six weeks preceding the ‘reference
date’ or during the two weeks preceding the ‘reference date’, whichever is
higher; and
ii.
Book value: Book value per share to be calculated
from the company's latest audited balance sheet (without considering
'revaluation reserves' adjusted for cash flows and financials post the earlier
restructuring.
·
In case of sale of equity held by banks as a result
of conversion or invocation of pledge, the ‘reference date’ shall be the
date on which the share purchase agreement between the bank and the new
promoter is executed.
V.
Non-applicability of these guidelines
The revival and
rehabilitation of MSMEs shall continue to be guided by RBI guidelines on Revival
and Rehabilitation of Micro, Small and Medium Enterprises (MSMEs).
Restructuring of
loans in the event of a natural calamity shall continue to be as per the
directions contained in RBI directs on Relief Measures by banks in
areas affected by Natural Calamities.
VI. Cases of
frauds/wilful defaulters.
Borrowers who have
committed frauds, malfeasance or wilful default will remain ineligible for
restructuring. However, in cases where the existing promoters are replaced by
new promoters, and the borrower company is totally delinked from such erstwhile
promoters/management, lenders may take a view on restructuring such accounts
based on their viability, without prejudice to the continuance of criminal
action against the erstwhile promoters/management.
Appendix
Non – Exhaustive
Indicative List of Signs of Financial Difficulty
·
Irregularities in cash credit or overdraft accounts
such as inability to maintain stipulated margin basis or drawings exceeding
sanctioned limits, periodic interest debited remaining unrealised;
·
Failure or anticipated failure to make timely
payment of instalments of principal and interest on term loans;
·
Delay in meeting commitments towards payments of
installments due, crystallized liabilities under LC/BGs, etc.
·
Excessive leverage;
·
Inability to adhere to financial loan covenants;
·
Failure to pay statutory liabilities, non- payment
of bills to operational creditors, etc.;
·
Non-submission or undue delay in submission or
submission of incorrect stock statements and other control statements, delay in
publication of financial statements and adversely qualified financial
statements;
·
Steep decline in production figures, downward
trends in sales and fall in profits, margin erosion etc.;
·
Elongation of working capital cycle, excessive
inventory build-up;
·
Significant delay in project implementation;
·
Downward migration of internal/external
ratings/rating outlook.
Annex – 2
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ICE Symbols
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Definition
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RP1
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considered to have the highest degree of safety
regarding timely servicing of financial obligations. Such debt
facilities/instruments carry lowest credit risk.
|
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RP2
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considered to have high degree of safety
regarding timely servicing of financial obligations. Such debt
facilities/instruments carry very low credit risk.
|
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RP3
|
considered to have adequate degree of safety
regarding timely servicing of financial obligations. Such debt
facilities/instruments carry low credit risk.
|
|
RP4
|
considered to have moderate degree of safety
regarding timely servicing of financial obligations. Such debt
facilities/instruments carry moderate credit risk.
|
|
RP5
|
considered to have moderate risk of default
regarding timely servicing of financial obligations.
|
|
RP6
|
considered to have high risk of default regarding
timely servicing of financial obligations.
|
|
RP7
|
considered to have very high risk of default
regarding timely servicing of financial obligations.
|
Based on RBI circular dated 12th Feb 2018. For
any further clarification in the matter, please visit www.rbi.org.in ............... Poppy
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