RBI Circular: Prudential Framework For Resolution Of Stressed Assets- A Paradigm Shift, Almost?
Amendments bought by RBI’s June 7 circular are a welcome step forward, writes SBI’s former deputy MD Sunil Srivastava.
Transitioning from a prescriptive rule-based regime to a more principle-based approach, the changes brought in by the Reserve Bank of India in its June 7 circular, are indeed a welcome step forward.
The RBI has been nudging banks to recognise, rectify, restructure or recover their non-performing assets for some time now. Finally, the guillotine had to be used via an asset quality review and the Feb. 12 circular. That circular, however, was struck down by the Supreme Court and so a revised circular was brought in.
Broadly, there have been three major changes effected through the revised framework.
First, the recognition period has been relaxed to include a 30-day review period followed by a 180-day resolution period. At one level, the zero-day default had shifted the balance in favour of bankers vis-a-vis their borrowers, but the 210-day reprieve will help alleviate some of the pain that went along with that.
Second, the requirement of 100 percent consent for a resolution plan has been reduced to 75 percent by value and 60 percent by number. The mandatory execution of an inter-creditor agreement, with dissenting creditors being offered exit at liquidation value, has also been included.
Third, incrementally punitive provisioning has been introduced to encourage greater expedition in the resolution process.
In addition, rule-based restructuring guidelines issued in the past have been dispensed with, leaving the process to the wisdom of the lenders overseen by the rating agencies.
A few practical issues remain. Some of which will probably find their own solutions as the framework gets tested and aligned dynamically. Some may need regulatory intervention.
These issues are detailed below.
NPA Classification
Any underwriting is based on certain assumptions on the continuity of comparable past trends factoring in changes that are foreseeable. Given the volatility in the markets and economy, both domestic and global, and the uncertainties caused by technological disruptions, product and customer preferences etc., the need to alter course, change gears and speed for most businesses could, perhaps, get more frequent.
These may necessitate revisiting the original assumptions. On account of these and other factors, businesses also have cyclicality.
It may not be unreasonable to assume that given our stage of development, most businesses would lack the felicity to respond seamlessly to such challenges without the active understanding and support of their bankers.
An NPA classification is quite stigmatic for any borrower. Much as we may wish otherwise, the fact remains that counterparty evaluation or exposures by any stakeholder to entities tagged as NPAs tends to become restrictive.
In such a situation, would it be practical to do away with the stigma of a downgrade to NPA status within the first 180 days, while retaining provisioning requirements? These accounts could continue to be classified as ‘Special Mention Accounts’ and be downgraded to ‘Sub-Standard’ only if they aren’t resolved within 180 days.
This may also be relevant to explore given the broad guidelines envisaged for discerning borrowers in “financial difficulty”.
Inter-Creditor Agreement
The inter-creditor agreement as envisaged in “Project Sashakt” would require to be amended and perhaps in due course may get universally accepted for all such cases.
Perhaps, it may be more expedient to have a common loan agreement for all exposures, which have multi-bank or consortium participation, which would provide for such situations to begin with and save considerable time in the resolution process, going forward.
This could be achieved under the aegis of the Indian Bankers’ Association.
Separately, an unintended consequence of requiring even Asset Reconstruction Companies to sign the inter-creditor agreement would perhaps lead to them taking their minimum exposure to at least 35 percent of the aggregate outstanding. This would allow them to retain some power in case a company goes for resolution under the Insolvency and Bankruptcy Code, where a minimum 66 percent of the committee of creditors must agree to a resolution plan.
This may eventually lead to a revision in their business model and further development of the asset reconstruction business.
Interim Finance
Even in the IBC process, it has been difficult for the insolvency resolution professional to raise interim finance to continue with the operations of the debtor, despite having priority in the resolution /liquidation proceeds.
Under the new rules, the lead bank(s) may have to pay out the dissenting creditors increasing their exposure. This would require a change in the mind-set of the sanctioning authorities, who have usually been more comfortable in accepting time and interest concessions rather than granting fresh loans. Paying out these loans to another creditor, too, may face some resistance.
This may require regulatory directions as well.
If we position prudence between rules and principles, while considerable progress has been achieved via this framework, as the entire ecosystem matures, we will see our regulations graduating from rule based to principles based. Meanwhile, in the transition, we also have to ensure that we do not tie ourselves up in knots leaving little wiggle room to adjust to the uncertainties of a volatile world.
Sunil Srivastava is retired Deputy Managing Director, SBI. Views are personal.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its Editorial team.