RBI’s fresh insolvency norm offers leeway on NPAs

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Instead, it gives bankers the flexibility to review a loan and plan a turnaround within 30 days of such default

The Reserve Bank of India on Friday issued new guidelines for banks to address bad loans. Unlike the controversial February 12, 2018 circular that was struck down by the Supreme Court in April, the new circular on non-performing assets (NPAs) does not force lenders to take errant borrowers to the insolvency court when they default in repayments by a day.

Instead, it gives bankers the flexibility to review a loan and plan a turnaround within 30 days of such default.

RBI has asked banks to put in place a resolution plan within one year of default. Banks will have to set aside additional capital against a bad loan if they fail to set up a resolution plan within this time. For a turnaround plan to be approved, 75 per cent of the lenders by value of the loan have to agree to it, as opposed to 66 per cent under the earlier framework.

The February 12 circular had made it mandatory for banks to report a default even if there was a single-day delay in repayment. It had also made it mandatory for banks to refer all loans of Rs 2,000 crore and above to the bankruptcy court within 180 days if a turnaround plan was not in place. The new circular leaves all turnaround plans and review to the banks’ discretion.

“Even though revised framework for resolution of stressed assets does away with implementation of resolution plan for borrowers overdue by up to 30 days, the overall framework will continue to incentivise banks for accelerated resolution of stressed assets,” said Karthik Srinivasan, group head, financial sector ratings, ICRA.

The new norms will be immediately applicable to all companies with a borrowing of over Rs 2,000 crore. It will be effective for companies having borrowings of Rs 1,500 crore to Rs 2,000 crore from January 1, 2020. For all loan accounts of up to Rs 1,500 crore, the date would be announced later.

Under the new guidelines, banks will have to report credit information on all borrowers with a loan of Rs 5 crore and above and submit weekly reports of all borrowers who have defaulted.

“The core of the February 12 circular remains intact. Stipulating creditors’ consent for a resolution agreed by lenders representing 75 per cent by value and 60 per cent by number is higher than in the Insolvency and Bankruptcy Code (IBC). Resolution can now be implemented in 365 days instead of 180 days,” said L Vishwanathan, partner, Cyril Amarchand Mangaldas.

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