The covid-19 pandemic has led to an economic slowdown. This has resulted in substantial financial stress on borrowers with an impact on their ability to generate cash flows. The Reserve Bank of India (RBI) has therefore issued a resolution framework for covid-19 related stress as set out in its circular dated 6 August 2020 (framework). The framework was addressed to all commercial banks and non-banking financial companies (lenders) among others. It enables lenders to implement a resolution plan in respect of borrowers suffering stress because of covid-19, while continuing to classify such borrower accounts as standard. This is partly defined as the account not being in default for more than 90 days.
The framework builds on the circular dated 7 June 2019 issued by RBI on the Prudential Framework for Resolution of Stressed Assets (prudential framework). The prudential framework provides concessions for borrower accounts experiencing financial difficulty, but downgrades the borrower accounts, except if there is a change in ownership, until they demonstrate satisfactory performance by meeting certain thresholds. The framework requires lenders to have board approved policies in place, detailing the eligibility of borrowers and the manner in which viable resolution plans for eligible borrowers can be implemented. Under the framework only those borrower accounts are eligible for resolution that were classified as standard and not in default for more than 30 days with any lender as on 1 March 2020. The framework provides for the resolution of an eligible corporate borrower (borrower) with such resolution being invoked not later than 31 December 2020 and with implementation in place within 180 days.
Where the borrower is indebted to a single lender, it may request the lender to invoke a resolution. The lender will decide whether to accept the request in accordance with its board policy and will be on a date agreed between the borrower and the lender. Where the borrower owes multiple lenders, the resolution process will be invoked if lenders representing 75 per cent by value of the total outstanding credit facilities, and not less than 60 per cent of lenders by number agree to do so. In cases involving multiple lenders, where the resolution process is invoked and consequently a resolution plan has to be implemented, an Intercreditor Agreement (ICA) will have to be signed by all the lenders within 30 days from the date of invocation. However, if the ICA is not signed by lenders representing not less than 75 per cent by value of the total outstanding credit facilities, and not less than 60 per cent of lenders by number within the 30 days, the invocation will be treated as lapsed and resolution under the framework cannot be invoked for that borrower.
A resolution plan under the framework includes any action or plan such as the sale of debts to other entities or investors, a change in ownership and restructuring, except compromise settlements that would continue to be governed by the provisions of the prudential framework, and any relevant conditions applicable to specific categories of lending institutions. The resolution plan may include granting additional credit facilities, even if there is no renegotiation of the existing debt.
The lender may also allow an extension to the residual tenor of the loan, with or without a payment moratorium, for not more than two years. The moratorium period, if granted, would come into force immediately upon implementation of the resolution plan. The resolution plan may also provide for conversion of a portion of the debt into equity or other marketable, non-convertible debt securities issued by the borrower, subject to prescribed conditions.
The framework further provides that RBI will set up an expert committee. The purpose of this committee is to establish financial parameters and sector specific desirable ranges for such parameters that must be factored into resolution plans. The expert committee is also required to vet resolution plans in which the aggregate exposure of the Lenders at the time of the invocation of the resolution process is ₹150 million (US$2 million) and above. Under the framework, the RBI has indeed constituted an expert committee under the chairmanship of a former CEO of ICICI Bank, and the committee has submitted its recommendations to the RBI. Following these recommendations the RBI on 7 September 2020 issued financial parameters for specific sectors.
In conclusion, the framework is a much-needed measure which has been taken by RBI in order to mitigate the impact of covid-19 on borrowers and to provide them with relief by way of resolution. This will enable such borrowers to revive and continue their businesses.
SNG & Partners has offices in New Delhi, Mumbai and Singapore. Harshil Shubham and Anjuli Hora are associates at the firm.
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