Strictly Private and Confidential

RBI’s Resolution Framework for COVID-19 related Stress

(Step in right direction)

August 2020

Novem Advisors Pvt Ltd.

Preamble 2

 Economic fallout due to Covid-19 pandemic has led to significant financial stress for
borrowers across the board – can impact long term viability as their debt burden becoming
disproportionate relative to their cash flow generation abilities

 Current Guidelines of June 07, 2019 provides principal-based resolution framework for
addressing borrower defaults under normal scenario – COVID is not only abnormal but akin
to force majeure

 Pertinent to save the good borrowers who otherwise have good track record

 Defaults may have led to higher NCLT flow / loss of business ownership which are built with
hard efforts and sweat – Discourages entrepreneurial spirit

 Moratorium was provided in the interim till the impact subsides and corporate / banks are in
a position to assess the impact and also expected cash flows – However, there was a need to
provide long term sustainable solution

 In order to revive the sectors and mitigate the impact, RBI has decided to provide a window
under the Prudential Framework to permit Resolution to eligible borrowers without change
in Ownership and without classification of account as NPA

Much Needed Relief now extended by RBI

Lenders Covered 3

All Commercial Banks (including Small Finance Banks, Local Area Banks and Regional
1 Rural Banks)

All Primary (Urban) Co-operative Banks / State Co-operative Banks / District Central
2 Co-operative Banks

All All-India Financial Institutions All Non-Banking Financial Companies (including

3 Housing Finance Companies)

Lenders to the borrower which are other than the lending institutions as per this
4 circular have option to participate

Not covered above : Mutual Funds, Insurance Companies;

However, they have the option to participate under 4 above by signing ICA

Lending institutions shall frame Board approved policies pertaining to implementation of viable
resolution plans for eligible borrowers under this framework
Eligible Borrower 4

Borrowers having
stress on account of
Account to continue Covid19
Lender to establish
as Standard till the
necessity of a
invocation of
Resolution Plan
Resolution

Account standard, but

not in default for more
Invocation not later
than 30 days with the
than 31st Dec 2020
lender as on March 1,
2020

Ineligible Borrower / Loans

o MSME borrowers with exposure of Rs.25 crore or less as on 1st March 2020
o Farm credits / Loans to Agricultural Credit Societies
o NBFCs, HFCs and Financial service providers
o Loans to Government Entities
o Exposures of housing finance companies
 Resolution Process
On or before 31st Dec 2020
Reference Date
Company Assessmen Invocation(1) Treated as lapsed
approaches t of Need Yes Signing of ICA No
of Resolution and Resolution
lenders / for by majority Within by majority (2) can not be invoked
Consortium Resolution 30 days
(2) of lenders again
No
Yes
Ineligible for
Resolution

Assessment of

Within 180 days

Approval and No Resolution plan by Yes
Implementation Exposure > Rs. lenders incl. TEV, Resolution
of RP by majority 1,500 cr boundaries laid out process begins
(2) in circular and ICE by
Yes Rating agency
Expert
Committee to
vet the
Resolution plan
 If timelines are breached, RP ceases to apply
Note:
immediately; IRAC provision will be applicable as if RP
1In case of single lender, date of invocation is the
process was never invoked
date on which both borrower & lending institution
have agreed to proceed with a resolution plan  Accounts not fulfilling eligibility conditions required
2 75% by value of the total O/s Credit facilities (FB + under this framework may continue to be considered
NFB) and 60% by number for resolution under Prudential Framework
Expert Committee 6

 EC shall recommend a list of financial parameters to be factored into each RP, and the
sector specific benchmark- which may cover leverage (Debt Equity), liquidity (Current
Ratio), debt serviceability (DSCR) etc.
 EC shall submit these parameters within 30 days to RBI
 The EC have the responsibility of vetting the RP to be implemented of all accounts with
total exposure of Rs.1500 Crs and above at the time of invocation
 The EC shall check and verify all the processes for implementation without interfering
with the commercial judgments exercised by the lenders
 The EC shall have its Office at IBA and all expenses shall be borne by the RBI
Features of Resolution Plan 7

 RP may include any action (except OTS) as per Prudential Norms

 RP may also include sanctioning of additional facilities even without restructuring of
existing debts
 Extension of the residual tenor of the loan, with or without moratorium, by a maximum
2 years and if moratorium granted, shall come into force immediately
o Ideally, this should have been left to the lenders to assess based on impact and
future cash flows – One size fits all may not work
 Revised assumptions of RP shall be at least the minimum financial parameters decided
by the EC
 RP may provide for conversion of the debt into equity or other marketable, non-
convertible debt securities at same terms as debt held on the books of the lending
institutions, post implementation
o This may defeat the purpose of converting part of Debt into other instruments
 RP in case of any account of Rs.100 Crs and above shall require rating by one Rating
Agency
 Post implementation all receipts shall be routed through Escrow Account by entering
into Escrow agreement to ensure proper functioning ; Agreement to also cover
enforcement mechanism
Asset Classification 8

 On implementation of RP, Asset classification is retained as

Standard.
 In case of slippage into NPA between date of invocation and
date of implementation, it is to be upgraded as Standard

Asset
Classification  Additional finance availed before implementation to remain
standard till implementation regardless of actual performance
in the interim

 If RP not implemented within stipulated time-frame additional

finance to be classified as per actual performance or rest of the
facilities whichever is worse

Major change as compared to June 07, 2019 circular where account would have turned
NPA on implementation
Provisioning 9

Lenders who signed the ICA within 30 days of invocation:

• Higher of - as per IRAC norms immediately before implementation, or
10% of the total debt, including the additional debt securities issued
Provisioning post-implementation of the plan (residual debt)

Lenders not signed the ICA within 30 days of invocation:

• Higher of the 20% of debts, or the provisions required as per extant
IRAC norms
• Lenders which had earlier agreed for invocation but did not sign ICA
shall also be required to hold 20% provisions on their carrying debt.

If plan is not implemented within 180 days, Provisions to be kept as if no Resolution was invoked

Lenders who signed the ICA within 30 days of invocation:

• 50% of Provisions to be reversed on payment of at least 20% Residual
Debt
Reversal of
• Bal. 50% on Payment of another 10% of the Residual Debt
Provisioning
Lenders not signed the ICA within 30 days of invocation:
• 50% of the Provisions to be reversed on payment of atleast 20% of the
carrying Debt
• Bal. 50% on payment of another 10% of the carrying Debt
 Post Implementation Performance 10

 In other cases, any default by the borrower with any of the signatories to the ICA shall trigger
a Review Period of 30 days during the monitoring period
 Monitoring Period is the period starting from the date of implementation of RP till the
borrower pays 10% of the residual debt, subject to a minimum of 1 year from the
commencement of the first payment of interest or principal whichever is later) on the
credit facility with longest period of moratorium
 If the borrower is in default with any of the signatories to the ICA at the end of the Review
Period, the asset classification of the borrower with all lenders, including those who did not
sign the ICA, shall be downgraded to NPA from the date of implementation of the RP or the
date from which the borrower had been classified as NPA before implementation of the plan,
whichever is earlier.
 Further upgradation shall be subject to implementation of a fresh restructuring, or the
relevant instructions as applicable to specific category of lenders where the Prudential
Framework is not applicable.
 Upon completion of the monitoring period without being classified as NPA, the asset
classification as per IRAC norms will be applicable
 The provisions, to the extent not already reversed, shall be available for: provisioning of other
accounts, where a RP been implemented and turned NPA; or other additional provisioning
requirements on account as per IRAC norms
Post Implementation Performance 11

Default by
Borrower with Triggers Review Period of 30
lenders signatories days to correct
to ICA
Corrected If not corrected
Monitoring Period*

Downgrade to NPA from date

A/c remains of Implementation or earlier
Standard NPA, whichever is earlier by all
lenders

A/c upgradation to
Fresh Restructuring
Standard as per Other Recovery
under Prudential
Prudential Measures
Framework
framework

*Till the repayment of 10% of the residual debt, subject to a mini of 1 year from the commencement of the first
payment of interest or principal (whichever is later) on the credit facility with longest period of moratorium)

Post monitoring period, the extant IRAC norms will apply for asset classification &
Provisioning
Disclosure and Credit Reporting 12

 Lending institutions publishing quarterly statements

o Make disclosures as per the Format-A in their financial statements for 3 quarters staring
March-2021.
o Make disclosures in the Format-B every half-year, i.e., in the financial statements as on
September 30 and March 31, starting from September 2021 till all exposures on
implemented RP are either fully extinguished or completely slips into NPA, whichever is
earlier.
 Lending institutions publishing only annual financial statements
o Make the required disclosures in their annual financial statements, along with other
prescribed disclosures.
 The credit reporting by the lenders in respect the implemented RP shall reflect the
“restructured” status of the account if the resolution plan involves renegotiations that would
be classified as restructuring under the Prudential Framework.
 The credit history of the borrowers shall consequently be governed by the respective policies
of the credit information companies as applicable to accounts that are restructured.
Assessment of the Scheme Contours 13

Parameter Remarks

Resolution without affecting IRAC Status  No NPA

Time-bound Resolution  Within 180 days

Disincentives to delay signing ICA  Additional Provisioning

Avoiding mis-utilization of Scheme  Tighter binderies / pre-requisites

No Restructuring Stigma  Account remains Standard

Provisions for Additional Funding  Helps to ramp-up

Cash flow based Repayments X Stipulation of 2 years of extension –

Needs to be structured based on
assessed business impact

Clarity on treatment of DP Shortfall X Circular is silent on how WCTL to be

repaid
Open Ended Issues 14

1 Excess borrowings over DP : Treatment of WCTL in terms of Tenor

o Whether WCTL needs to be repaid in 2 years ?
2 Whether Funding of Interest is permissible :
o If yes, whether FITL needs to be repaid in 2 years ?

3 Account needs to be serviced and kept Standard till the Invocation of Resolution Plan
o May further put pressure on cash flow and further erosion of working capital

4 Sector specific Financial parameters

o May turn out to be a cumbersome process to monitor and may delay the entire
process
o Companies with more than one business may face the complications

Despite few of the ambiguities, it is a step in the right direction and will provide
requisite reliefs to corporate
Disclaimer 15

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 THANK YOU

Shrenik Vora Santosh Gupta

Managing Director Vice President
Novem Advisors Pvt Ltd. Novem Advisors Pvt Ltd.
Mob No : +91 9920999530 Mob No : +91 9820133235
Email ID : shrenik.vora@novemadvisors.com Email ID : santosh.gupta@novemadvisors.com