In December 2016, Modi – government enacted the Insolvency and Bankruptcy Code [IBC] – a robust and impeccable legal framework for recovery of non-performing assets [NPAs] of lenders in a fast track mode. It also amended the Banking Regulation Act [BRA] [2017] arming the Reserve Bank of India [RBI] with powers to give directions to banks for making reference to National Company Law Tribunal [NCLT] for resolution of NPAs under IBC.
Pursuant to the above, on February 12, 2018, the RBI issued an order requiring that in respect of accounts with aggregate exposure of the lenders at Rs 2,000 crore and above, as soon as there is a default in the borrower’s account with any lender, all lenders – singly or jointly – shall initiate steps to cure the default. The resolution plan [RP] – approved by all lenders – has to be readied within 6 months from the date of default. If, the deadline is missed, the case is referred to NCLT who gets 6 months to complete the resolution process.
RBI had also abolished all existing mechanisms for resolution of NPAs such as strategic debt restructuring [SDR], corporate debt restructuring [CDR], scheme for sustainable structuring of stressed assets [S4A] and the Joint Lenders’ Forum [JLF]. All accounts, including those where any of these schemes were invoked but not yet implemented, were also governed by the revised framework.
Under the circular, thus far, over 70 accounts involving NPAs worth about Rs 380,000 crore have been either referred or on the verge of being referred to the NCLT.
Meanwhile, the circular was challenged by a spate of affected parties with the power generators being in the forefront [they alone account for about Rs 200,000 crore NPAs]. On April 2, 2019, the Supreme Court [SC] quashed it. The SC opined that the RBI does not have legal authority to issue a generalized order to the banks though it has upheld the legal validity of section 35AA of the amended BRA under which it can give directions on specific cases – under authorization from the union government.
The RBI has now come up with a revised circular to deal with stressed assets. From the day a loan account is in default, the lenders get 30 days to enter in to an inter-lender agreement [ILA] to decide on a resolution plan [RP]. Further, unlike the February 12, 2018 circular, which required them to finalize RP within 180 days, the present order prescribes no time limit. Instead, it only requires them to make an additional provision of 20% if RP is not ready within 180 days and a further 15% if not ready within 365 days. The plan has to be approved by 75% of the lenders by value and 60% by number.
If, the lenders can’t come up with a plan and eventually decide to refer the account to NCLT then, the provisions can be reversed viz. 50% of it at the time of initiating the proceedings under IBC and the balance when the case is admitted by the Tribunal.
A loud message from the revised circular is that the RBI has abdicated its responsibility of forcing the banks to act which was the spirit behind the amendment to BRA. It has thrown the ball back in the court of banks who will have a field day. Considering that in the past, they never showed seriousness in dealing with NPAs, one wonders whether things will be different now.
The regulators’ stipulation that banks can’t resurrect any of the erstwhile mechanisms for resolution of NPAs – or the so called sweet-heart deals viz. SDR, CDR, S4A etc – [those were abolished concurrent with the February 12, 2018 circular] is no consolation. The real problem is one of delayed action by banks leading to fast erosion in the enterprise value. The revised order has done little to deal with it.
The new dispensation has restored the status quo ante. It will render the resolution under the IBC dysfunctional. When, the NPA account is not allowed to reach NCLT within a reasonable time frame, how can action begin? This leads us to some burning questions.
Why was there so much of hue and cry over the earlier order? Why did the businesses perceive it to be draconian? Why are they scared of resolution under IBC?
Under Feb 12, 2018 circular, from the day of default, banks were allowed 6 months to work out a RP. Even after it comes under IBC, a fair attempt is made by the RP [resolution professional] to realize maximum value as a ‘going concern’. For this, 6 months is allowed extendable by 3 months. Only thereafter, the liquidation process is triggered. In short, the stakeholders get a full 15 months to arrive at a settlement on best terms.
In genuine cases [where the account got into trouble due to factors beyond control], 15 month is a reasonable period for striking a good deal. If, the stakeholders can’t do it then, surely there is something amiss. In such a scenario, giving lenders a free hand which the present order seeks to do [additional provisioning 15%/35% for delay is no deterrent] would lead to ‘business as usual’.
The Feb 12, 2018 circular was indeed the way forward. It was not scary and resolution under IBC is not harsh. Yet, the vested interests have managed to get it scuttled by the highest court [albeit on technical ground]. Nonetheless, RBI has the powers to act on specific cases – under authorization from the union government. The irony is that it is unwilling to bite!
In the interest of protecting banks’ capital, the RBI should keep the levers in its hands and order time-bound resolution in specific cases. To ensure that it does not run in to legal tangle, the centre can issue a blanket authorization to the apex bank.