With a firm deadline and clear process now in place, banks can no longer dither on resolution plans (RP) for defaulting companies. Over the past couple of years, banks have attempted to revive businesses via one scheme or another — a strategic debt restructuring or an S4A — and if one process failed, another could be tried out. The Reserve Bank of India (RBI) is now empowering banks to come up with revival schemes. These could include a sale of the exposures to other investors as also a change in the ownership of the businesses. Banks could also reorganise or restructure the debt, much in the manner of a corporate debt restructuring, such that payments are regularised. Late on Monday evening, the RBI asked banks, either singly or jointly, to initiate an RP as soon as a corporate default is spotted. In other words, banks have several options to revive the defaulting companies but these must be exercised within 180 days.
From now on, as soon as a loan is classified as special mention accounts — SMA 0 — banks must begin resolution proceedings. SMA 0 loans are those where payments are overdue by 1-30 days. The accompanying charts shows the extent of SMA 0 loans for public and private sector banks; the level currently is quite low. Going by the new framework for resolution of stressed accounts, released late on Monday, the fate of a defaulting entity will be sealed within 465 days. If lenders are not able to work out a solution to revive a company within 180 days, the account must be referred to the National Company Law Tribunal and the case would be decided under the Insolvency and Bankruptcy Code.
For exposures of Rs 2,000 crore or more, where the company is a defaulter, the meter starts ticking on March 1, 2018. For smaller companies, to which lenders have an exposure of between Rs 100 crore and Rs 2,000 crore, the RBI is expected to come out with timelines in due course.
While the central bank has recommended the dismantling of the joint lenders forum, bankers FE spoke to said lenders would nonetheless work together to come up with a solution for near-bankrupt businesses. Sunil Srivastava, deputy managing director, State Bank of India, observed that recognising stress early in the day and acting on it quickly should help keep bad loans in check.
The new guidelines require a lender to initiate a resolution plan as soon as a default — whether on principal or interest — takes place. This could be as soon as one day after payments are delayed. Earlier, action was initiated only after 60 days of repayments being overdue.
Union Bank of India MD and CEO Rajkiran Rai G pointed out that companies often faced short-term cash flow issues and were unable to service their loans for a month or so. “This does not mean the account will become an NPA (non-performing asset),” Rai explained. Typically, accounts classified as SMA 0 or SMA 1 — where the payments are overdue for 30 days and 60 days, respectively — actually do not slip.
The central bank defined default as non-payment of debt when whole or any part or an instalment of the amount of debt has become due and payable and is not repaid by the debtor. However, there is no change in recognising an account as an NPA; an asset will be classified as an NPA after 90 days from the date of default.
For any of these accounts that have been recognised as default accounts as on the reference date, the time to implement the RP starts from March 1. If an account default after March 1, 2018, then the RP will have to be implemented within 180 days from the date of default. These accounts also include those where a resolution has been initiated under the existing schemes as well as those that have been classified as restructured standard assets.
Subsuming all past schemes and providing banks the flexibility to work out a realistic resolution plan is a good move, said Manish Aggarwal, partner and head of resolutions, KPMG India. Aggarwal believes it could be a challenge for bankers to work out a proposal that involves a reasonable interest reduction without any framework in place. “This still remains a grey area. Having said that, this cleaning up of the system is the need of the hour,” Aggarwal added.