In order to put a check on the increasing number of non-performing assets and restructured accounts in the Indian banking system, the Reserve Bank of India (RBI) released the “Framework for Revitalising Distressed Assets in the Economy” in January, 2014 (Framework). The Framework outlines the procedure for banks and non-banking financial companies (NBFCs) to identify financial distress early by classifying loan accounts into special mention accounts (SMA) and to take prompt steps to resolve stress by arriving at a joint corrective action plan (CAP) to ensure fair recovery. Once an account is reported as a SMA-2 account, the lenders are mandated to form a joint lenders’ forum (JLF), if the aggregate exposure of the lenders in such accounts is INR 1000 million and above. In furtherance of the Framework, the RBI issued circulars to banks and NBFCs on 26 February 2014 and 21 March 2014 respectively.
Megha Agarwal
Deep Roy
Babu Sivaprakasam
Subsequent to the implementation of the Framework, the RBI has issued various clarifications on the subject in order to improve the efficacy of the Framework. However, there were still some practical difficulties being faced by banks and financial institutions as regards their participation in the JLF and implementation of the joint CAP. With the intent of ironing out these issues, the RBI issued a circular dated 24 September 2015 (JLF Circular) revising the Framework based on the feedback received from banks.
Empowered Group and Senior Level Representation
The JLF Circular puts the onus on the lead bank to convene the meeting of the empowered group of lenders, a newly introduced concept. The empowered group of lenders will consist of about seven representatives from specified banks, with representatives from ICICI Bank and the State Bank of India being the standing members of such a group. The concept of the empowered group of lenders is similar to that of the corporate debt restructuring empowered group (CDR EG). The issue presently being faced by the corporate debt restructuring cell is the time being taken by the CDR EG for providing any approvals. Lenders often face a difficulty in coordinating amongst each other and in convening such meetings. This would probably lead to a second CDR cell. As regards small lenders, their interests would not be adequately represented in such meetings and foreign lenders may also face difficulties in such scenarios.
Recognising that decisions of the JLF are often not approved by the boards of the banks due to lack of representation by senior officials, the JLF Circular states that though there is no explicit requirement on the same, banks ought to depute sufficiently empowered senior level officials for participating in the meetings of the JLF. This move should enable banks to effectively implement the decisions of the JLF.
Disagreement and Exit Option
One of the major disincentives for lenders who were part of the JLF was that they would be bound by a decision to restructure the account, if it was approved by a minimum of 75% of creditors by value and 60% of creditors by number. This was specifically problematic in case of lenders with a minority stake who would have signed the inter-creditor agreement and would have no option except to be bound by such a decision. The JLF Circular enables lenders to exit without having the new lender to provide additional finance. Existing lenders now effectively have the choice of agreeing on rectification or restructuring as CAP or exiting their exposure completely. This step would be an added incentive for lenders to efficaciously engage in the JLF process and enable early resolution of stressed assets.
In the event an existing lender exercises the exit option, the new lender has the option of choosing not to participate in additional finance, if the CAP involves additional finance. In such a case, the other existing lenders would have to meet the share of the additional finance of the existing lender who has exited, on a pro-rata basis. Since, the new lender has the option of not contributing to any form of finance; the exit process could be smoother thereby not hampering the restructuring of the account.
Restructuring of Doubtful Accounts and Penal Provisions
Prior to the JLF Circular, JLFs were not permitted to consider accounts classified as ‘doubtful’ for the purposes of restructuring, unless the account was standard/sub-standard in the books of at least 90% of the creditors by value. The JLF Circular now permits the JLF to restructure an account classified as ‘doubtful’ in the books of one or more lenders, if the account has been assessed as viable under the techno-economic viability study and the empowered group of lenders approves the proposal.
The Framework provides that banks and financial institutions would be subject to accelerated provisioning in the event of non-compliance of certain stipulated provisions of the Framework. However, the Framework was initially silent on the duration for which such accelerated provisioning would be effective. The JLF Circular now prescribes the specific durations for which accelerated provisioning will be applicable in relation to each of the penal provisions under the Framework.
The JLF Circular was initially not applicable to non-banking financial companies. However, the RBI recently issued a circular dated October 29, 2015 making the provisions of the JLF Circular applicable to non-banking financial companies as well. On the whole, though the clarity on penal provisions comes as a relief, the presence of senior officials of banks and constitution of the empowered group of lenders would hardly seem to be a solution to the issue being faced by banks and financial institutions. One would hope that these steps aide in bringing down the rise in non-performing assets in the Indian economy.
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This article has been authored by Babu Sivaprakasam, partner, Deep Roy, associate Partner and Megha Agarwal, associate at Economic Laws Practice (ELP), Advocates & Solicitors. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.
