RBI’s New Loan Recast Scheme

On 6^th August, 2020, the Reserve Bankof India(RBI) gave the green signal to a loan restructuring scheme for stressed borrowers.
The so called ‘Resolution Framework for Covid19-related Stress’, has been announced as a special window under the Prudential Framework on Resolution of Stressed Assets issued on June 7, 2019.

Only those companies and individuals whose loans accounts are in default for not more than 30 days as on March 1, 2020, are eligible for one-time restructuring.
For corporate borrowers, banks can invoke a resolution plan till December 31, 2020 and implement it till June 30, 2021.
For personal loans, the resolution plan can be invoked till December 31, 2020 and will be implemented within 90 days thereafter.

The RBI has set up a five-member expert committee headed by K V Kamath, former Chairman of ICICI Bank, which will make recommendations on the financial parameters required.

Entry Barriers:The earlier restructuring schemes did not have any entry barrier, unlike the current scheme that is available only for companies facing Covid-related stress, as identified by the cut-off date of March 1, 2020.
Defined Timeline:Strict timelines for invocation of resolution plan and its implementation have been defined in the scheme, unlike in the past when this was largely open-ended.
ICA Signing Mandatory:The structuring of the scheme makes signing of theInter-Creditor Agreements (ICA) largely mandatory for all lenders once the resolution plans has been majority-voted for, otherwise they face twice the amount of provisioning required.
Independent Validation:Loans above Rs 100 crore will require only one credit agency’s validation.Large loans above Rs 1,500 crore will also require to be vetted by Kamath committee.
Penalties for Delays: Earlier schemes had no disincentives for lenders delaying an agreement for restructuring. The present scheme provides a for a 20% penal provision for lenders not signing the ICA.
Post-Monitoring Performance: In this scheme a default with any of the lenders will automatically lead to a 30-day review period. Loans will be classified as NPAs if 10% repayment is not done during this period.

Key sectors, such as micro, small and medium enterprises (MSMEs), hospitality, aviation, retail, real estate and auto, which are facing liquidity crunch, will benefit from the move.
This restructuring plan will also enable lenders to implement a resolution plan in respect of eligible corporate debtors without a change in ownership, while classifying such exposures as standard, if they meet certain conditions.
The central bank’s move will also incentivise banks to lend more to corporates through bonds, something that had stalled in the wake of covid-19.
The biggest impact will be that banks will be able to check the rise in non-performing assets (NPAs) to a great extent.
However, it will not bring down the NPAs from the present levels; legacy bad loans of close to Rs 9 lakh crore will remain within the system.
Banks will have to maintain additional 10% provisions against post-resolution debt, and lenders that do not sign the ICA within 30 days of invocation of the plan will have to create a 20% provision.

Corporate Debt Restructuring (CDR)

The RBI discontinued the CDR scheme from April 1, 2015.
For several years, corporates were misusing the debt recast plans with the regulator turning a blind eye to manipulations by shady promoters in connivance with some banks.
The promoters of many big corporates siphoned off bank funds while their units suffered. They approached the CDR Cell and to get their loans recast, some of them more than once.
These promoters managed to get fresh loans and they used liberal loan recasts to evergreen their accounts and keep out of the NPA books.

Strategic Debt Restructuring (SDR)

Under the SDR scheme, banks were given an opportunity to convert the loan amount into 51% of equity which was to be sold to the highest bidder, once the firm became viable.
This was unable to help banks resolve their bad loan problem as only two sales have taken place through this measure due to viability issues.

Sustainable Structuring of Stressed Assets (S4A) Scheme

Under this, banks were unwilling to grant write-downs as there were no incentives to do so, and write-downs of large debtors could exhaust banks’ capital cushions.

5/25

The 5/25 scheme was derailed because refinancing was done at a higher rate of interest so that banks could preserve the net present value of the loan amount.
There was a perception that this was one of the tools deployed to cover NPAs by banks.

Asset Reconstruction Scheme(ARC)

In the ARC, the major problem was that asset reconstruction companies (ARCs) were finding it difficult to resolve assets they had bought from banks. Therefore, they wanted to purchase the loans only on low prices.
Consequently, banks were reluctant to sell them loans on a large scale.

The RBI has built in safeguards in the resolution framework to ensure it does not lead to ever-greening of bad loans as in the past.
Restructuring of large exposures will require independent credit evaluation done by rating agencies and a process validation by the Kamath-led expert committee.
Unlike in the case of restructuring of larger corporate exposures, for personal loans there will be no requirement for third party validation by the expert committee, or by credit rating agencies.
The RBI has said that the term of loans under resolution cannot be extended by more than two years.
To mitigate the impact of expected loan losses, banks need to make a 10% provision against such accounts under resolution.

KV Kamath Committee

On 7^th August, 2020, the RBI constituted an expert panel headed by K V Kamath, to give recommendations on the required financial parameters, along with the sector specific benchmark ranges which need to be factored into the resolution plans.
Other Members:Diwakar Gupta (effective September 1, 2020, after the completion of his term as Vice President, ADB);T.N. Manoharan (effective August 14, 2020, after the completion of his term as Chairman, Canara Bank);Ashvin Parekh, Strategy AdvisorCEO, Indian Banks’ Association, as the Member Secretary.
The expert committee shall undertake the process validation for the resolution plans to be implemented under this framework, without going into the commercial aspects, in respect of all accounts with aggregate exposure of Rs1,500 crore and above at the time of invocation.
The Indian Banks’ Association (IBA) will function as the secretariat to the committee and the committee will be fully empowered to consult or invite any person it deems fit.
The Committee shall submit its recommendations on the financial parameters to the Reserve Bank which, in turn, shall notify the same along with modifications, if any, in 30 days.