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NPAs decline to 9.3% in FY19, deeper than RBI estimate: CRISIL  |  June 12, 2019


The system-wide non-performing assets stock has declined massively to 9.3% in March 2019, much faster than the RBI’s estimate and steeply down from 11.5% the year before, says a report


System-wide non-performing assets (NPAs) have declined in fiscal 2019 to 9.3%, as of March 2019, after tripling to 11.5% in the four fiscals till March 2018, a CRISIL report said, on June 10, 2019. The report comes at a time, when most banks are at the cusp of an end to the NPA pains after a prolonged period and are concentrating on the resolution now.


In its half-yearly financial stability report in December 2019, the Reserve Bank of India (RBI) had estimated that the gross non-performing assets ratio might improve to 10.3% by March 2019 from 10.8% in September 2018. “In a sign of possible recovery from the impaired asset load, the gross NPA ratio of both public and private sector banks showed a half-yearly decline, for the first time since March 2015, the financial year prior to the launch of asset quality review by the RBI,” CRISIL said, in the report.


Bad loan recognitions accelerated largely due to a nudge from the RBI, which wanted bank balance sheets to reflect a true picture of the stress. The RBI’s asset quality review led to a massive spike in NPAs and was supported with the enactment of the bankruptcy law for resolving the cases. However, the progress on the bankruptcy cases has not been very fast, as the legal provisions keep getting challenged frequently and the lack of precedents results in delays in arriving at resolutions due to legal tangles. Experts point out that this is part of the teething troubles, which any legislation goes through.


RBI issues new guidelines for resolution of stressed assets


After the Supreme Court nullified the Reserve Bank’s circular of February 12, 2018, for the resolution of stressed assets, the central bank has issued a revised ‘Prudential Framework for Resolution of Stressed Assets’


June 10, 2019: Two months after the Supreme Court struck down the February 12, 2018 circular, the Reserve Bank, on June 7, 2019, issued a revised framework for resolving stressed assets, by offering lenders a 30-day period to label an account as an NPA but has withdrawn all other resolution methods. The new directions, effective immediately, retain the basic spirit of the February 12, 2018 circular, as it mandates higher provisioning, bankruptcy options, as well as do not allow any other resolution methods outside the new norms. The central bank, in a notification, said the new norms provide a framework for early recognition, reporting and time-bound resolution of stressed assets.


The new norms mandate lenders to put in place board-approved policies for resolution of stressed assets, including the timelines for resolution. The new framework offers some leeway on provisioning for stressed accounts, which will help banks with low capital. Now, lenders will have to make 35% provisions &ndash the first 20% for 180 days and then an additional 15% if no resolution is found within 365 days. The new norms are applicable to all borrowers with exposure of Rs 2,000 crores and above, to banks, financial institutions like Nabard, Exim Bank, Sidbi, small finance banks and NBFCs, with immediate effect, the monetary authority said.


“Once a borrower is reported to be in default by any lender, others should undertake a review of the borrower account within 30 days from such default, to be called as ‘review period’,” the RBI said. During the 30-day review period, lenders may decide on the resolution strategy and approach for implementation of the resolution plan, it said, adding lenders may also choose to initiate legal proceedings for insolvency or recovery. In cases where resolution plans are to be implemented, all lenders shall enter into an inter-creditor agreement (ICA), during the review period, the RBI said, adding the ICA shall provide any decision agreed by lenders representing 75% by value of total outstanding credit facilities and 60% of lenders by number shall be binding upon all the lenders, helping speed up the resolution process.


Legal experts hailed the new framework as it retains the core of the February 12, 2018 circular, as it offers a mechanism that will enable resolutions through requisite majority. “This framework builds on the February 12, 2018 circular and provides for a mechanism that will enable resolutions through requisite majority. The stipulation of an inter-creditor agreement will enable banks to collectively decide resolutions outside the IBC,” L Viswanathan, a partner at law firm Cyril Amarchand Mangaldas said.


Another law firm Economic Laws Practice, specialising in NCLT cases, said the new norms address the fundamental reasons that led to the Supreme Court to strike down the February 12 circular. “The new norms are uniform, in as much as it applies to banks, financial institutions and NBFCs alike. Hopefully, NPA resolution will now pick up speed,” its managing partner, Suhail Nathani said.


The RBI said that for accounts with aggregate exposure above Rs 2,000 crores, the resolution plan shall be implemented within 180 days from the end of the 30-day review period. For borrowers with exposure between Rs 1,500 crores and Rs 2,000 crores, the new norms will be applicable from January 1, 2020, while for loans up to Rs 1,500 crores, it will be announced in due course.


“Lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA-0, SMA-1 and SMA-2),” the RBI said. Under the new norms, lenders shall have to report credit information, including classification of an account as SMA to the central repository of information on large credits, on all borrowers having aggregate exposure of Rs 5 crores and above with them. The central bank said that since default with any lender is a lagging indicator of financial stress faced by a borrower, it is expected that the lenders initiate the process of implementing a resolution plan even before a default.


Resolution plans involving restructuring/change in ownership, in respect of accounts where the aggregate exposure is Rs 100 crores and above, will require independent credit evaluation (ICEs) of the residual debt by RBI-authorised credit rating agencies. Accounts with exposure of Rs 500 crores and above will require two ICEs implementation of such resolution plan, the RBI said, adding in case where a viable resolution plan is not implemented within the timelines, all lenders will have to make additional provisions of 20% if a resolution is not implemented within 180 days from the end of the review period. An additional provision of 15% (total provisioning of 35%) will have to be made, if no resolution is found within 365 days of the review period.


The RBI also warned that any action by lenders to conceal the actual status of accounts or evergreening the stressed accounts, will be subjected to stringent supervisory/enforcement actions as deemed, including, higher provisioning on such accounts and monetary penalties. The central bank asked lenders to make disclosures in their financial statements, under ‘notes on accounts’, relating to resolution plans implemented.


The new norms replace all the earlier resolution plans, such as the framework for revitalising distressed assets, corporate debt restructuring scheme, flexible structuring of existing long-term project loans, strategic debt restructuring scheme, change in ownership outside SDR, scheme for sustainable structuring of stressed assets, and the joint lenders’ forum with immediate effect.


RBI to issue fresh circular on resolution of bad loans


RBI governor Shaktikanta Das has said that the central bank will soon come out with a revised circular for effective resolution of stressed assets, in the back of the Supreme Court’s quashing of an earlier circular


April 4, 2019: In the light of the Supreme Court order, the Reserve Bank of India (RBI) will take necessary steps, including issuance of a revised circular as may be necessary, for the expeditious and effective resolution of stressed assets, governor Shaktikanta Das said, on April 4, 2019. The announcement came, after the Supreme Court quashed an RBI circular of 2018 that pertains to the provisions for referring defaulters to the National Company Law Tribunal (NCLT) even on a one-day overdue.


“The court has said that the power of the RBI under Section 35AA has to be exercised in a certain manner. The validity of section 35AA of the Banking Regulation Act 1949 stands and henceforth, we have to comply with the direction of Supreme Court and act accordingly,” Das said. Section 35AA empowers the central government to authorise the RBI to issue directions to any banking company or companies, to initiate insolvency resolution process in respect of a default under the provisions of the IBC.


The revised framework for the resolution of stressed assets issued on February 12, 2018, invited criticism from various quarters, including a parliamentary panel. The RBI substituted the previous guidelines with a harmonised and simplified generic framework for resolution of stressed assets, in view of the enactment of the Insolvency and Bankruptcy Code. “Although the new guidelines have been termed as harmonised and simplified generic framework, yet they are far from being so,” the Standing Committee on Energy in its report tabled in Parliament in 2018 said.


“The Committee are of the opinion that the coinage of restructuring in resolution plan is hollow, without having any serious meaning or business, which only reflects the blurred vision of (the) RBI in understanding and appreciating the problems. The Committee expects that clarity of thought and transparency in approach should be the guiding factor, to streamline and strengthen the sector squirming under ineluctable hardships,” it had said.


SC strikes down RBI circular on insolvency, may delay recovery of bad loans


The Supreme Court has struck down an RBI circular that directed banks to take recourse to the Insolvency and Bankruptcy Code for resolving bad debts


April 3, 2019: In a verdict that gives relief to distressed power companies but could delay bankruptcy proceedings, the Supreme Court, on April 2, 2019, quashed a tough 2018 RBI circular on resolving bad debt, under which a company is declared bankrupt even if it misses its repayment schedule by a day. An early resolution of stressed loans impacted by the circular is expected to be hit, following the verdict that gives flexibility to lenders to restructure debts. Legal and industry experts gave a mixed response, saying that while the verdict is a ‘great setback’ for banks, it also offers relief to the troubled companies.


The circular prescribed rules for recognising one-day defaults by large corporates and initiating insolvency action as a remedy. The Reserve Bank of India (RBI), on February 12, 2018, issued a circular on the resolution of stressed assets revised framework &ndash commonly known as February 12 circular. According to the circular, lenders had to classify a loan account as stressed, if there was even a day of default. The bankers had to mandatorily refer all accounts with over Rs 2,000 crores of loans to the National Company Law Tribunal (NCLT) or the bankruptcy court, if they failed to resolve the problem within 180 days of default. The circular also said that if a resolution was not found by August 27, non-performing asset (NPA) accounts should be sent to bankruptcy courts.


The power sector was the worst hit by the circular and so were companies in the steel, textile, sugar and shipping sectors. In its 84-page verdict, the court held that the generic circular, directing banks to take recourse to the Insolvency and Bankruptcy Code (IBC) was beyond the powers of Section 35AA of the Banking Regulation Act. It said reference to the IBC can be made only on a case to case basis and there cannot be a general direction in this regard.


GMR Energy Ltd, RattanIndia Power Ltd, Association of Power Producers (APP), Independent Power Producers Association of India, Sugar Manufacturing Association from Tamil Nadu and a shipbuilding association from Gujarat, had moved different courts against the circular. The power sector argued that outstanding loans of Rs 5.65 lakh crores (as on March 2018) were a result of factors beyond their control such as unavailability of fuel and cancellation of coal blocks. However, during the pendency of the matter, the apex court, on September 11, 2018, asked banks to maintain status quo and not to initiate insolvency proceedings against loan-defaulting companies.


Basis on which the SC struck down the RBI circular


The court said there was nothing to show that the provisions of Section 45L(3) (Power of the bank to call for information from financial institutions and to give directions) have been satisfied in issuing the impugned circular. “The impugned circular nowhere says that the RBI has had due regard to the conditions in which and the objects for which such institutions have been established, their statutory responsibilities and the effect the business of such financial institutions is likely to have, on trends in the money and capital markets. The impugned circular will have to be declared as ultra vires as a whole and be declared to be of no effect in law. Consequently, all actions taken under the said circular, including actions by which the Insolvency Code has been triggered, must fall along with the said circular,” said a bench comprising justices RF Nariman and Vineet Saran.


The petitioners challenged the circular, arguing that applying a 180-day limit to all sectors of the economy without going into the special problems faced by each sector would treat ‘unequals equally’ and would be arbitrary and discriminatory and therefore, violative of Article 14 of the constitution of India. Vishrov Mukerjee, partner, J Sagar Associates said after the Supreme Court judgment, the RBI may have to issue revised guidelines/circulars for the restructuring of stressed assets. “There is also a question mark over existing processes which may have been completed/nearing completion,” he said.


Cyril Shroff, managing partner, Cyril Amarchand Mangaldas, termed the ruling as a major development that shows how ‘proactive’ the judiciary has been. “While it is too early to say but if banks voluntarily still invoke IBC &ndash the practical impact will be minimal,” he said. ICRA senior vice-president Sabyasachi Majumdar said the verdict is likely to result in a further slowdown in the already tardy pace of resolution of stressed assets in the power sector. Srikanth Vadlamani, vice-president, financial institutions group, Moody’s Investors Service, said voiding of the circular is credit negative for Indian banks. “The circular had significantly tightened stressed loan recognition and resolution for large borrowers. With the voiding, this may now have to be watered down. The resolution of stressed loans impacted by the circular will be further delayed as the process may have to be started afresh,” he said. The verdict is a ‘great setback’ in respect of the actions initiated by banks before the NCLTs against the defaulting companies, which were covered under the impugned circular, said Rajesh Narain Gupta, managing partner at law firm SNG & Partners.