Resolution Framework for Stressed Corporate Assets during COVID-19: A Brief Analysis
Introduction
The Prudential Framework for Resolution of Stressed Assets notified by the Reserve Bank of India (“RBI”) on June 7, 2019 (“Prudential Framework”)[1] provided for implementation of a resolution plan for entities who had borrowed funds but were unable to repay their lenders due to financial difficulties faced by them. However, in the past few months, organizations throughout the world have faced an economic crisis due to the widespread of Covid-19 and its aftermath, with organizations in India being no exception to the same. Due to this significant adverse impact on the business and revenue generation, organizations, who otherwise had a good track record, were not able to repay their loans. Considering these circumstances, the RBI notified the Resolution Framework for Covid-19 related Stress on August 06, 2020 (“Special Framework”),[2] which provides for a one-time-restructuring of debts of eligible borrowers who are affected on account of Covid-19.
Comparison between the Prudential and Special Frameworks
Both the Prudential Framework and the Special Framework were notified by RBI inter alia with the objective of: (a) providing aid and support to organizations, (b) restructuring their debts, and (c) preventing such organisations from corporate death. However, the circumstances in which the aforesaid frameworks have been notified are different, and therefore, the scope and provisions of the frameworks differ. Some significant differences have been highlighted hereunder:
- Change in Asset Classification
Under the Prudential Framework, if there is a restructuring of debt, an asset which was previously classified as “standard”, will be downgraded to “non-performing asset”, except where the restructuring results in change in ownership, subject to other conditions in the Prudential Framework. Whereas, under the Special Framework, the loan accounts which were considered as “standard” prior to the implementation of the resolution plan, shall continue to be categorized as “standard”. The loan accounts that were classified as a non-performing asset (“NPA”) after the invocation of the resolution mechanism but before the implementation of the resolution plan, maybe upgraded as “standard”, without any requirement of change in ownership pursuant to the restructuring.
- Eligible Borrowers
The recourse to loan restructuring under the Special Framework is available only to the exposures which have taken a hit due to Covid-19, with certain categories of loans excluded from the eligibility list as per Paragraph 2 of Annex to the Special Framework.[3] The Special Framework specifically provides that only those accounts that have been classified as “standard” and the defaults, if any, should not have continued for more than 30 (thirty) days as on March 01, 2020 and such exposures should still be standard until the date of invocation of the resolution process.
3. Resolution Process
The Prudential Framework provided for timelines for initiation of resolution of stressed assets within 30 (thirty) days from the date of default and the default date was based on the amounts of exposures. On the other hand, the Special Framework does not differentiate between the timelines for invocation of resolution procedure based on the amount of the exposure. Under the Special Framework, the eligible borrowers and the lenders can invoke the resolution procedure at any time prior to December 31, 2020 and the resolution plan under the Special Framework is required to be implemented within 180 (one hundred eighty) days from the date of invocation.
Single Lender: Unlike the Prudential Framework, the Special Framework clarifies that in the event there is only one lender, then the resolution process shall stand invoked on the date when both the lender and the borrower have agreed to invoke the same. Such single lenders shall take decisions in relation to the implementation of resolution plan, due diligence of the borrower, and consider the eligibility of the borrowers as per the policy approved by the board of the lending institution, and such policy shall not be in contravention with the provisions of Special Framework.
Multiple Lender: If multiple lenders have provided loans to the borrower, then the lenders representing at least 75% (seventy five percent) value of the total outstanding loans and at least 60% (sixty percent) by numbers have to agree to invoke the resolution process (“Quorum”). Thereafter, all the lenders are required to sign the inter-creditor agreement within a period of 30 (thirty) days. If the inter-creditor agreement is not signed by the lenders equal to the Quorum, then the resolution process shall lapse, and the borrower shall not be permitted to invoke the resolution process subsequently under the Special Framework.
Unlike the Prudential Framework, the Special Framework prevents the borrowers to take recourse to the resolution process under the latter on the pretext of aforesaid lapse or any breach of timelines therein. However, this might lead to an issue for borrowers where there are multiple lenders, as the execution of inter-creditor agreement due to disagreement between the lenders may breach the 30 (thirty) day period, thereby preventing the borrowers to take benefit of the Special Framework.
Furthermore, the aforesaid lapse or breach of any other timelines as per the Special Framework will require the exposures to be restructured and resolution plans to be implemented, if any, in accordance with the provisions of the Prudential Framework.
4. Key Terms of the Resolution Plan
Similar to a resolution plan under the Prudential Framework, a resolution plan under the Special Framework is permitted to contain provisions related to the sale of exposures to other entities and restructuring of debts including change in ownership. However, the compromise settlements continue to be governed by the Prudential Framework. In addition to the aforesaid, the resolution plan under the Special Framework may include provisions in relation to additional loans, extension of the original tenure of the loan, with or without payment moratorium, by a period not more than 2 (two) years. If a moratorium is also agreed under the resolution plan, the same be effective immediately upon the implementation of the resolution plan.
Key Takeaways
The Special Framework has expanded the scope of lenders to include all commercial banks and non-banking financial companies when compared with the Prudential Framework. However, the exposures that were restructured under the Prudential Framework, consequently downgrading the asset classification of such exposures from ‘standard’ category, will not be permitted to be restructured under the Special Framework, even if the new defaults are solely because of Covid-19.
Additionally, the timeline of 180 (one hundred and eighty) days within which the resolution plan must be implemented, maybe overzealous, especially in a situation where multiple lenders are involved and inter-creditor agreement must be executed. Moreover, if the timelines under the Special Framework are breached, the whole resolution process will be construed as lapsed and no recourse, including a fresh proposal, would be available to the eligible borrowers under the Special Framework. This may result in diminishing the objectives of the Special Framework.
However, despite the aforesaid, the Special Framework has been drafted in a manner that aims to provide long-term relief to eligible entities on account of economic fallout due to Covid-19 as against the moratorium on repayment which was available for 6 (six) months[4]. Therefore, it can be said that the Special Framework has tried to strike a balance between the interests of the lenders and the borrowers.
The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal, Hyderabad.
[1] Prudential Framework for Resolution of Stressed Assets, dated June 7, 2019, available at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11580&Mode=0
[2] Resolution Framework for COVID-19-related Stress, dated August 6, 2020, available at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11941&Mode=0
[3] (a) MSME borrowers whose aggregate exposure is less than Rs. 25 crore on March 1, 2020, (b) Farm credit, (c) Loans to Primary Agricultural Credit Societies (PACS), Farmers' Service Societies (FSS) and Large-sized Adivasi Multi-Purpose Societies (LAMPS) for on-lending to agriculture, (d) Exposures of lending institutions to financial service providers, (e) Exposures of lending institutions to Central and State Governments; Local Government bodies (eg. Municipal Corporations); and, body corporates established by an Act of Parliament or State Legislature, (f) Exposures of housing finance companies where the account has been rescheduled in terms of para 2(1)(zc)(ii) of the Master Circular - The Housing Finance Companies (NHB) Directions, 2010 after March 1, 2020.
[4] COVID-19 – Regulatory Package, dated March 27, 2020 available at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11835&Mode=0 read with COVID-19 – Regulatory Package, dated May 23, 2020, available at https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11902&Mode=0.