New Prudential Framework Introduced for Resolution of Stressed Assets

The Reserve Bank of India (“RBI”) issued the ‘Prudential Framework for the Resolution of Stressed Assets’ (“New Framework”) on June 7, 2019 in light of the Supreme Court decision revoking the previous circular dated February 12, 2018.

The New Framework introduces the following major changes:

  • Previously, the February 12, 2018 Circular only extended only to scheduled commercial banks. However, the New framework extends to the following:
    • Scheduled Commercial Banks (excluding Regional Rural Banks);
    • All India Term Financial Institutions;
    • Small Finance Banks; and
    • Systemically Important Non-Deposit taking Non-Banking Financial Companies (NBFC-ND-SI) and Deposit taking Non-Banking Financial Companies (NBFC-D).
  • Earlier, the timeline for resolution of stressed assets was one hundred and eighty (180) days from the date of default. The New Framework has now introduced a thirty (30) day review period (“Review Period”) prior to the commencement of the previous one hundred and eighty (180) days timeline within which the lenders can conduct a prima facie review of the defaulting company and decide on a resolution strategy. The said timeline, commences as follows.
    • In case of any account having outstanding loans in excess of Rs. 20,000,000,000 (Rupees Twenty Billion Rupees Only), the Review Period shall commence from:
      • June 7, 2019 (if the date of default is prior to June 7, 2019).
      • Actual date of default (if such default occurs post June 7, 2019).
    • In case of any account having outstanding loans above Rs. 15,000,000,000 (Rupees Fifteen Billion Rupees Only) but less than Rs. 20,000,000,000 (Rupees Twenty Billion Rupees Only), the Review Period will commence from:
      • January 1, 2020 (if the date of default is prior to January 1, 2020).
      • Actual date of default (if such default occurs post January 1, 2020).
    Accounts having outstanding loans less than Rs. 15,000,000,000 (Rupees Fifteen Billion Only) are not covered under the New Framework.
  • If the lenders decide to execute a resolution plan, they are now required to enter into an Inter-Creditor Agreement (“ICA”) during the Review Period.

    Such ICA is required to state that a resolution plan, if executed, would be affected by a vote of lenders holding 75% share of the outstanding loans and 60% of lenders by number, binding upon the whole of the consortium of creditors.

  • Earlier RBI pursuant to its circular dated February 12, 2018 had issued a blanket instruction to refer all corporate defaults above Rs. 20,000,000,000 (Rupees Twenty Billion Only) for resolution under the IBC process. The New Framework states that the RBI can only issue instructions to banks for initiating resolution under the IBC, for specific defaults and on a case to case basis only.
  • The New Framework has been received well as it has made it voluntary for lenders to take defaulters to the bankruptcy court. However, the slower than expected progress of resolution under Insolvency and Bankruptcy Code is seen as a key hurdle.