10 June 2019: The Reserve Bank of India’s (RBI) new circular on bad loans have watered down the stringent provisions of February 12, 2018 circular, which had set in motion a speedier action that involved a change in the management of defaulting borrowers.
The new framework now prescribes far lower provisions, longer resolution period and does not force lenders to refer accounts to the bankruptcy court for a change in management and gives a prolonged period to implement a resolution outside the bankruptcy court. Provision is the percentage of the loan that the banks have to set aside as a capital buffer.
The new guidelines, experts warn, will take the steam out of the recovery efforts and push the banking system to the old days, when bankers delayed any concrete action and the defaulters were not under pressure to repay back.
Under the new circular issued on June 7, for loans of Rs 2,000 crore and above the circular comes into effect from the same day. These accounts get another 30 days of the review period and another 6 months to repay. The borrower can repay on the 179 th or the 180th day without a resolution plan and make the account standard.
It has handed out an even longer rope for loans of Rs 1,500 crore but below Rs 2,000 crore. For these loans, the circular comes into effect only from January 1, 2020, which means these borrowers need to repay only by the middle of 2020. For loans below Rs 1,500 crore, RBI is yet to announce a date.
As a result, the big chunk of mid-sized and large corporate loans get time till December 2019 to regularise their repayments. These accounts will have their 30 day review period from January 1, 2020, and then another 180 days to implement the resolution plan. Effectively these borrowers have time till June 6, 2020, to repay their loans. The new guidelines give a 30-day review window from the date of default and attract a maximum provision of 35% if banks fail to come up with a turnaround plan in a year. Once the resolution is implemented the additional provisions are reversed and the account is considered standard. If in case it is referred to the NCLT, 50% of the provisions can be reversed.
For term loans, the review period of 30 days begins from the first day of default and for working capital loans the review period starts after a 30-day default.
“The new circular has taken into consideration the banker’s issue in implementing the resolution plan. Many accounts going to the NCLT were not the solution. We are now allowed to have a resolution plan outside the bankruptcy court which is a positive development. Liquidation is not always the answer for a default,” said Rajnish Kumar, chairman, State Bank of India (SBI)
While the February 12 circular scripted by former RBI governor Urjit Patel had insisted on a 50% provisioning when accounts are referred to the NCLT. If the turnaround plan was not in place by 180 days from the first of day default, banks had to refer the account to the NCLT and implement a change in management. Maximum provisioning under the new circular is 35% over a one year period which will be completely reversed on implementation of a resolution plan. It does not insist on referring to the NCLT but allows for a change in management outside the NCLT. However, the new promoter should hold 26% equity stake in the company along with voting rights and should not be in any way related to the defaulting promoter.
“With the discretion given to the bank to have a resolution plan in place then it will go back to the old days when banks and borrowers will not be in a hurry to resolve their issues and there is no threat of the promoter group being changed,” said a consultant at a corporate advisory firm.
Bankers have to put in place a resolution plan in 180 days failing which they have to undertake additional provisioning of 20% and if a resolution plan is not implemented in one year then another 15% additional provisions against the unpaid loan. Failing to implement a restructuring plan in 365 days attracts additional provisioning burden of 35%.
Even on NPA upgrades, the new guidelines have been soft. Repayment of 10% of the principal or interest allows a bank to upgrade it to standard. In the earlier circular, companies had to repay 20% of the outstanding principal or the interest for an upgrade.