The Reserve Bank of India (RBI) has given small and medium-sized defaulters enough time to come out from the stressed account books of banks and regularise their repayments while maintaining its tough stance vis-a-vis big defaulters.
The RBI, which announced the revised ‘Prudential framework for resolution of stressed assets’ on June 7, has given a significant portion of the mid-sized corporate loans time till December 2019 to regularise their repayments. “Effectively these borrowers have time till June 6, 2020, to repay their loans,” Care Ratings said.
The review period for defaulters between Rs 1,500 crore and less than Rs 2,000 crore will start only from January 1, 2020. For loans below Rs 1,500 crore, the RBI is yet to announce a date, indicating that the central bank is expected to take a lenient approach to small defaulters. The review period for big defaulters of Rs 2,000 crore and above will start with immediate effect.
According to Care Ratings, the ICA (inter-creditor agreement) would provide for rights and duties of majority lenders, duties and protection of rights of dissenting lenders, treatment of lenders with priority in cash flows/differential security interest, etc. In particular, the resolution plans (RPs) should provide for payment not less than the liquidation value due to the dissenting lenders, it said.
“Dissenting lenders would have to exit at the liquidation value which may not be in their interest and would effectively pressurise them into accepting the terms agreed by the majority of the lenders. Further, if liquidation value becomes miniscule or negative, such lenders may end up not receiving any portion from the recovery,” it said.
On June 7, two months after the Supreme Court declared the RBI’s now-famous “February 12 circular” on resolution of stressed loans as unconstitutional, the RBI unveiled a new circular by relaxing several provisions in the earlier circular, including the one-day default norm, consent of lenders and more freedom to lenders in implementing the asset resolution plan. Scrapping its earlier norm of initiating resolution plan after a one-day default, the RBI has now said that the lenders should now review the accounts within 30 days of default and initiate a resolution plan under new norms.
Soumya Kanti Ghosh, group chief economic adviser, SBI, said “A better time-frame and transition offered in the framework on this would allow the lenders the headroom and flexibility for resolution in large ticket cases … noteworthy is the consensus among lenders in terms of value and number. Earlier, 100 per cent consensus required, but with new framework in place 75 per cent lenders by value and 60 per cent by numbers would be required for resolution. Further, lenders are to enter into inter-credit agreement.”
“The provision relating to resolution implementation within 180 days from March 1, 2018 (reference day / default day), no longer exists for large accounts with aggregate exposure of more than Rs 2000 crore. Instead, slab-wise reference dates have been set as per table provided herein. All these measures, are likely to facilitate better realisation and write back of provisions. Going forward, the asset quality is also seen improving. Overall we believe, various efforts made by RBI in strengthening its regulatory and supervisory framework and the resolution mechanism initiated through IBC are bearing fruit,” Ghosh said.
According to Karthik Srinivasan, group head, ICRA, incentives to reverse 50 per cent of these provisions upon reference under IBC will incentivise lenders to refer such stressed cases to IBC for faster resolution. “Restructured loans can be upgraded only when all the outstanding loan facilities demonstrate ‘satisfactory performance’ (ie, the payments in respect of borrower entity are not in default at any point of time) during the period from the date of implementation of RP up to the date, by which time at least 10 per cent of the sum of outstanding principal debt and interest capitalisation sanctioned as part of the restructuring is repaid,” according to Kotak Securities. Large accounts need certification by rating agencies. For accounts above Rs 100 crore exposure, any upgrade would also require a minimum rating of BBB- (i.e. investment grade).