Revised Framework for NPA classification by RBI.
In view of the implementation of the Insolvency and Bankruptcy Code, 2016, the RBI vide its circular dated February 12, 2018 has revised its guidelines for resolution of stressed assets to harmonise them with IBC.
A. Early identification and reporting of stress
Lenders shall immediately identify the first indication of any stress in loan accounts, including a one day delay, by classifying the stressed assets as special mention accounts (SMA) as per the following categories:
Where the Principal or interest payment or any other amount wholly or partly is overdue between
1-30 days: It shall be classified as SMA-0 account;
31-60 days: shall be classified as SMA-1 account;
61-90 days: shall be classified as SMA-2 account;
Lenders shall report credit information, including classification of an account as SMA to Central Repository of Information on Large Credits (CRILC) on all borrower entities having aggregate exposure of Rs 5 crore and above with them. The CRILC-Main Report will now be required to be submitted on a monthly basis effective April 1, 2018. In addition, the lenders shall report to CRILC, all borrower entities in default (with aggregate exposure of Rs 5 crore and above), on a weekly basis, at the close of business on every Friday, or the preceding working day if Friday happens to be a holiday.
B. Implementation of Resolution Plan
All lenders must put in place Board-approved policies for resolution of stressed assets under this framework, including the timelines for resolution. As soon as there is a default in the borrower entity’s account with any lender, all lenders − singly or jointly − shall initiate steps to cure the default. The resolution plan (RP) may involve any actions / plans / reorganization including, but not limited to, regularisation of the account by payment of all overdues by the borrower entity, sale of the exposures to other entities / investors, change in ownership, or restructuring.
C. Implementation Conditions for RP
A Resolution Plan in respect of borrower entities to whom the lenders continue to have credit exposure, shall be deemed to be ‘implemented’ only if the following conditions are met:
a. the borrower entity is no longer in default with any of the lenders;
b. if the resolution involves restructuring; then
i. all related documentation, including execution of necessary agreements between lenders and borrower / creation of security charge / perfection of securities are completed by all lenders; and
ii. the new capital structure and/or changes in the terms of conditions of the existing loans get duly reflected in the books of all the lenders and the borrower.
D. Timelines for Large Accounts to be Referred under IBC
In respect of accounts with aggregate exposure of the lenders at Rs 2,000 crore and above, on or after March 1, 2018 (‘reference date’), including accounts where resolution may have been initiated under any of the existing schemes as well as accounts classified as restructured standard assets which are currently in respective specified periods (as per the previous guidelines), RP shall be implemented as per the following timelines:
i. If in default as on the reference date, then 180 days from the reference date.
ii. If in default after the reference date, then 180 days from the date of first such default.
If a RP in respect of such large accounts is not implemented as per the timelines specified in paragraph 8, lenders shall file insolvency application, singly or jointly, under the Insolvency and Bankruptcy Code 2016 (IBC) within 15 days from the expiry of the said timeline.
Norms Applicable to Restructuring
Restructuring is an act in which a lender, for economic or legal reasons relating to the borrower's financial difficulty, grants concessions to the borrower. Restructuring would normally involve modification of terms of the advances / securities, which would generally include, among others, alteration of repayment period / repayable amount / the amount of instalments / rate of interest / roll-over of credit facilities / sanction of additional credit facility / enhancement of existing credit limits / compromise settlements where time for payment of settlement amount exceeds three months.
A. Asset Classification
In case of restructuring, the accounts classified as 'standard' shall be immediately downgraded as non-performing assets (NPAs), i.e., ‘sub-standard’ to begin with. The non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring.
B. Conditions for Upgrade
Standard accounts classified as NPA and NPA accounts retained in the same category on restructuring by the lenders may be upgraded only when all the outstanding loan / facilities in the account demonstrate ‘satisfactory performance’ (i.e., the payments in respect of borrower entity are not in default at any point of time) during the ‘specified period’ (as defined in paragraph 10 of the covering circular).