By the beginning of 2018, there are high incidence of provisioning, quarterly losses reported by banks etc. in the country because of a new framework implemented by the RBI about resolution of stressed assets. This means that resolution procedures, asset recognition, way of handling restructured assets, disclosure etc. have been made very strict. Similarly, there is stringent treatment of default of large accounts (borrowings). As a result, banks are compelled to make higher provisions. All of these developments happened when the RBI launched the new framework for the resolution of stressed assets on February 12, 2018.
The new framework for resolution of stressed assets
The Reserve Bank of India has brought out a new framework for the resolution of stressed assets on February 12, 2018. This new framework is aimed to facilitate the stressed asset resolution in the context of the launch of the Insolvency and Bankruptcy Code 2016. A notable feature of the new framework is that most of the requirements for resolution has become more stringent. Strict regulations regarding reporting of stress by large borrowers, vigilant policies by the lenders who undertake resolution of stressed assets, strong conditions for the implementation of resolution plans, revised prudential norms for restructuring under IBC and non-IBC, penalties for concealment of stressed assets by banks etc., are the major features of the new framework.
- Early identification and reporting of stress
For the identification of early stress, the RBI already designed the Special Mention Account (SMA) categories. The SMA status for early stress are expressed in term of number of days before an asset reaching NPA status. The SMA classification is given below.
Table: SMA classification
|SMA Sub-categories||Principal or interest payment or any other amount wholly or partly overdue between|
Reporting to the CRILC
In the case of borrower entities whose exposure is more than Rs 50 million, the lenders shall report credit information about SMA to the Central Repository of Information on Large Credits (CRILC). The CRILC is an information depository about borrowers having aggregate exposure of Rs 50 million or more with the lenders.
From April 1, 2018 onwards, the CRILC-Main Report should be submitted monthly.
Besides, the lenders shall send weekly report to the CRILC about all borrower entities in default on large credits (aggregate exposure of Rs 50 million and above).
- Implementation of Resolution Plan (RP) by the lenders
Under the framework, all lenders must create Board-approved policies for resolution of stressed assets. It also includes the timelines for resolution. As soon as there is a default by the borrower with any lender, all lenders – individually or jointly – shall initiate steps to cure the default. The Resolution Plan shall be clearly documented by all the lenders.
- Implementation Conditions for Resolution Plan
The new framework brings stricter conditions for the implementation of RP. Here, a resolution plan will be implemented by the lender if:
- The borrower entity is no longer in default with any of the borrowers; and
- in case of restructuring, all documentation of agreements between the lenders and borrow should be completed.
Independent credit evaluation should be obtained by the borrower in case of restructuring of large accounts (more than Rs 1 billion).
- Timelines for Large Accounts to be Referred under IBC
For accounts with total exposure of the lenders at Rs 20 billion and above, on or after March 1, RP shall be implemented as per the following timelines:
- If in default as on the reference date, then 180 days from the reference date.
- If in default after the reference date, then 180 days from the date of first such default.
If Resolution Plan is not implemented, then lenders should file insolvency application.
If a RP in respect of large accounts (Rs 20 billion and more) is not implemented, lenders shall file insolvency application, individually or jointly, under the Insolvency and Bankruptcy Code 2016 within 15 days from the expiry of the set timeline.
For accounts with total exposure of the lenders below Rs 20 billion and, at or above Rs 1 billion, the RBI, over a two-year period, will announce reference dates for implementing the RP when there is a default.
Revised prudential norms
Revised prudential norms for restructuring will be applicable for those accounts under the IBC framework or outside the IBC.
Supervision: provisioning and penalties for concealing stressed assets
The RBI brings penalty and higher provisions if banks tries to conceal stressed assets. Any failure on the part of lenders in meeting the prescribed timelines or any actions by lenders trying to conceal stressed assets or to evergreen the stressed accounts, will be subjected to stringent supervisory and enforcement actions by the RBI, including, higher provisioning on such accounts and monetary penalties.
Disclosure about resolution
Banks in their financial statements should make disclosures about resolution plans implemented by them.