The rise in the number of non-performing assets, commonly known as NPA has
led to an adverse impact on the economy of our country. The banks act as an
intermediary between the depositor and the borrower thereby exhibiting the need
to be protected from the stressed assets.
This led the Reserve Bank of India to
frame certain guidelines on the Resolution of stressed assets. The circular
dated June, 7 2019 which provides for the Prudential Framework for resolution of
stressed assets by banks. This article seeks to understand the salient features
of the present circular and provide for a critical analysis of the distinct
features of the same.
What led to the demise of the circular of February 12, 2018?
It all began in the year of 2017 when the RBI decided to issue an Ordinance
which introduced Section 35AA in the Banking Regulation Act of 1949. This
empowers the RBI with the prior authorization of the Central government to issue
directions for the purpose of initiating the insolvency resolution process in
respect of a specific default under the Insolvency Bankruptcy Code, 2016.
Eventually, this led to the introduction Framework for resolution of stressed
assets in the month of February, 12 2018 which has now been declared to be ultra
vires as it provided for the resolution of stressed assets in general and not
for specific assets. Along with this, it did not discuss the statutory
responsibilities of non-banking Financial institutions and did not have ‘due
regard’ to the objectives behind the formation of these financial institutions.
Features of the circular dated June 7, 2019
The circular has the following set of features:
a) The circular provides for a review period of 30 days. During this
period, the borrower is required to study the borrower account carefully along
with determining the procedure of implementation of the resolution plan.
b) The RBI authorizes the lenders to implement the resolution plan in
case of any instance of default. Therefore, the lender is required to implement
the resolution plan even if there is no default that has taken place.
c) The June 7 circular has mandated the formation of an inter-creditor
agreement (ICA) whereby the decision of lenders representing 75% of the credit
facilities (fund based as well as non-fund based) and 60% of the lenders by
number shall be binding upon all lenders. In addition to this, the ICA may
provide for the rights and duties of the majority lenders, treatment of lenders
on a priority basis in terms of cash flows and securities and the protection of
the rights of the dissenting lenders.
d) The reference date on the basis of aggregate exposures has been provided
for. According to this, the reference date for the aggregate exposure of Rs. 20
billion and above is June 7, 2019, for an aggregate exposure of Rs. 15 billion
and above but less than Rs.20 billion, the reference date shall be January 1,
2020 and for aggregate exposures of less than Rs. 15 billion, the reference date
is yet to be announced.
e) The revolving credit facilities are now treated differently for the
purposes of being declared as NPA.
f) The RBI authorizes the lenders to formulate the board policies which is
required to include the resolution plan that has to be implemented by the lender
in case of any default.
g) The June 7 circular provides for an additional provisioning of 20% in
case of a delay in the implementation of the resolution plan by 180 days from
the end of the review period and an additional 15% in case of a delay by 365
days from the commencement of the review period. This accounts for a total
additional provisioning of 35%.
a) The NBFCs are not subject to the review period. Therefore, in case of
calling upon a default, the NBFCs are at an advantage of proceeding with an
immediate implementation of the resolution plan. However, this acts as a
disadvantage to the other lenders as they will be unable to monitor the account
of the borrower and amount to a hasty decision which might turn out to be bad
for the process of implementation of the resolution plan.
b) The circular provides for a non-exhaustive list of instances of default.
The lenders are required to monitor the performance of the borrower and study
the actions the lenders are required to understand the instances of default and
are required to call for one. This is yet another advantage to the lender as it
speeds up the procedure of recovery and prevents a default by larger amounts and
allows the lenders to study the account of the borrower on a regular basis
c) Lastly, the additional provisioning acts as a bad remark in the balance
sheet of the lender as it shows the high amount of loan losses which is not good
for the health of the lender.
The RBI is the boss of every other bank and therefore assumes the responsibility
of directing the banks to take certain steps in the event of a crises (NPA being
one such crises). By the means of the circular of 2019, the RBI seeks to resolve
the rising NPA crises. The circular creates a positive and negative impact on
the NBFC. Not being subject to review period provides the NBFC with the
discretion to call for a default and implement the resolution plan. whereas, on
being hit with the highest number of NPAs, a higher provisioning will amount to
a further decrease in the profits of the NBFCs. Unlike the circular of February
12, the present circular has addressed the problems faced by the NBFCs.
 Lenders to include Scheduled Commercial Banks (excluding Regional Rural
Banks), All India Term Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI),
Small Finance Banks, Systematically Important Non-Deposit taking Non-Banking
Financial Companies and Deposit taking Non-Banking Financial Companies.
Written by: Akanksha Pandey
-5th year student at Symbiosis Law School, Pune
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