RBI notifies special framework for one-time restructuring of COVID-19 stress

Introduction
Timeline and key steps
Key takeaways


Introduction

On 6 August 2020 the Reserve Bank of India (RBI) announced a resolution framework for COVID-19-related stress (the framework) to address borrower default pursuant to the stress caused by the pandemic without necessitating a change of ownership and without an asset classification downgrade modifying the existing framework (prudential framework).(1)

The COVID-19 stress framework covers resolutions regarding personal and corporate loan accounts. This article focuses on the key changes introduced for corporate loan accounts (ie, exposures other than personal loans).

Timeline and key steps

Applicability
The framework applies to:

• commercial banks;
• primary cooperative banks;
• state cooperative banks;
• district-level cooperative banks; and
• all Indian term financial institutions and all non-banking financial companies, including housing finance companies.

Eligibility
Only those borrower accounts which were classified as standard, but not in default for more than 30 days with any lending institution as of 1 March 2020 and those accounts with stress due to COVID-19, are eligible for resolution under the framework.

Banks and financial institutions must put in place board-approved policies to ensure that the above criteria are met.

Exceptions
The following exceptions apply to the framework:

• micro, small and medium enterprise (MSME) borrowers whose aggregate exposure to lending institutions is collectively Rs25 or less as of 1 March 2020;(2)
• farm credit;
• loans to 'financial service providers' (as defined under the Insolvency and Bankruptcy Code);
• central and state governments, local government bodies (eg, municipal corporations) and body corporates established by an act of the legislature; and
• borrower exposures to housing finance companies which are restructured under certain existing guidelines.

Invocation
Invocation is the date on which a borrower and lender (by applicable majority) have agreed to proceed with a resolution plan.

If there are multiple lending institutions with exposure to the borrower, invocation must be made with the agreement of the lenders (75% in value and 60% in number).

Inter-creditor agreements
In cases involving multiple lenders, an inter-creditor agreement (ICA) must be signed by all lenders within 30 days of invocation.

In cases where the resolution process has been invoked but lenders representing at least 75% in value and 60% in number do not sign the ICA within 30 days, the invocation will be treated as lapsed and the resolution process cannot be invoked again under the framework.

Lenders not covered in this framework may also sign the ICA if they so desire and must ensure that the ICA contains a dispute redressal mechanism that clearly lays down the recourse available to its signatories.

Resolution mechanisms
The resolution plans under this framework may involve any of the mechanisms under the prudential framework (eg, the sale of exposure, the change in ownership or the restructuring or rescheduling of debt).

Lenders can also extend the tenor of the facilities by up to two years. The plan may also involve sanctioning additional facilities.

Implementation
Plans must be implemented within 180 days from invocation. The conditions to be met for a plan to be implemented are specified in the prudential framework.

Asset classification relief
If a resolution plan is implemented for existing credit facilities, a standard classification to continue or classification to be upgraded to standard (if it has become a non-performing asset (NPA)) on implementation is required. If no resolution plan is implemented, there are no reliefs or asset classifications as per prudential norms (from the date of the NPA).

The following criteria apply to additional finance:

• from 'invocation' until implementation – 'standard';
• on implementation – 'standard' asset classification to continue; and
• if not implemented – as per asset classification applicable with respect to remaining credit facilities or performance (whichever is worse).

Any default by the borrower with one of the ICA signatories during the monitoring period will trigger a 30-day review period.(3)

If default continues at the end of the review period, asset classification will be downgraded to an NPA from the original date of the NPA classification or date of the plan's implementation (whichever is earlier).

Provisioning relief
Additional provisioning on account of the extant guidelines can be reversed on invocation of the resolution process under this framework.

On implementation, provisioning must be 10% or as per prudential norms (whichever is higher). If lenders did not sign the ICA, provisioning must be 20% or as per prudential norms (whichever is higher).

Where provisioning relief is not implemented, the prudential norms apply.

Other aspects
The RBI has set up an expert committee chaired by KV Kamath which will make recommendations on the required parameters and sector-specific benchmark ranges to be factored into each resolution plan (other committee members include Diwakar Gupta, TN Manoharan, Ashvin Parekh and the Indian Banks' Association's CEO).

The committee will also validate plans for accounts with aggregate debt of Rs1,500 or more. A resolution plan for accounts where the aggregate exposure at the time of invocation is Rs100 or more require an independent credit evaluation by any RBI-authorised credit rating agency.

For accounts involving consortium or multiple banking arrangements, all receipts and repayments by borrowers and disbursals to borrowers must be routed through one lender escrow account.

Key takeaways

At present, lenders cannot initiate insolvency proceedings for any loans in default after 25 March 2020 for six months (this timeframe is set to expire on 25 September 2020, but is extendable by another six months). Therefore, lending institutions will be substantially incentivised to explore a resolution plan under the framework for any accounts that are in stress on account of COVID-19. However, lending institutions will need to be quick when deciding which accounts should be referred to resolution under the framework, especially for accounts where a moratorium has already been granted (which is currently available for payments due by 31 August 2020) on account of the eligibility conditions prescribed under the framework.

It remains to be seen whether the 180-day timeline is feasible for implementing the resolution plan under the framework. The voting threshold of 75% in value and 60% in number may also limit the ability of lenders to implement resolution plans quickly, given past experience with other debt restructuring schemes notified by the RBI.

Lending institutions must put in place board-approved policies to evaluate whether a borrower is under COVID-19-related stress. Court decisions have suggested that all defaults that have occurred during the moratorium period should be classified as COVID-19-related defaults regardless of other factors that may have caused the default; it remains to be seen whether the RBI will share the same opinion.

For further information on this topic please contact Anand Shah at AZB & Partners by telephone (+91 22 4072 9999) or email (anand.shah@azbpartners.com). The AZB & Partners website can be accessed at www.azbpartners.com.

Endnotes

(1) RBI (Prudential Framework for Resolution of Stressed Assets) Directions 2019, 7 June 2019.

(2) The RBI has declared a separate modified framework for resolution of distressed MSME borrowers under a separate notification issued on 6 August 2020.

(3) The monitoring period is from the date of the resolution plan's implementation until the borrower pays 10% of the residual debt, subject to a minimum of one year from the first payment of interest or principal (whichever is later) on the facility with the longest moratorium.