The Reserve Bank of India (RBI) recently unveiled a new set of norms governing the handling of stressed or Non-Performing Assets (NPAs) in the banking sector. The new directive also extends to Non-Banking Financial Companies, Small Finance Banks, and other Financial Institutions. The revised guidelines present a different strategy for addressing defaults and resolving debts, taking both preventative and punitive measures.
New Review Period and Resolution Plan Implementation
One significant change in the norms is that lenders will now have a 30-day review period to develop a resolution strategy. This deviates from earlier norms that obligated lenders to commence a resolution strategy at even a single day default. Furthermore, lenders are expected to initiate the implementation of a resolution plan (RP) before an actual default occurs.
Lenders are also required to recognize any budding stress in loan accounts immediately upon default. Such assets will be classified as special mention accounts (SMA).
Special Mention Accounts (SMAs) Categories and Their Consequences
There are different categories of SMAs based on their respective default duration: SMA-0, SMA-1, and SMA-2. Accounts that fail to pay the principal or interest due within 0-30 days will be placed in the SMA-0 category, qualifying them for insolvency resolution proceedings.
Accounts that don’t pay between 31-60 days will be classified as SMA-1 defaulters and taken for Insolvency and Bankruptcy Code (IBC) proceedings. If no payment of dues is made within the period of 61-90 days, SMA-2 firms will be treated at the National Company Law Tribunal (NCLT).
Independent Credit Evaluation (ICE) and Aggregate Exposure
In instances where restructuring or change in ownership of accounts with an aggregate exposure of Rs 100 crore and above is required, an independent credit evaluation (ICE) of the residual debt will be conducted by credit rating agencies approved by the RBI for this purpose. For accounts with aggregate exposure of Rs 500 crore and above, two such ICEs are mandatory, while others will require only one ICE.
Additional Provisions and Reporting
Lenders are also required to submit a weekly report to the RBI on defaults by borrowers with exposure of ₹5 crore and above. The new norms put in place a system of disincentives in the form of additional provisioning for delays in implementing the resolution plan or initiating insolvency proceedings.
| Review Period | Additional Provisioning Required |
|---|---|
| 180 days from the end of the review period | 20% |
| 365 days from the end of the review period | 15% (total 35% when combined with the previous provision) |
This means that if the resolution is not implemented within 180 days from the end of the review period, banks will have to make additional provisions equivalent to 20% of the total outstanding. If the resolution is not finalised in 365 days, an extra 15% provision (making a total of 35%) must be made.
Inter Creditor Agreement (ICA)
To implement the resolution plan, lenders are required to sign an inter creditor agreement (ICA) within the review period. The ICA outlines the ground rules for finalising and implementation of the resolution plan. Any attempts to conceal the actual status of accounts or rejuvenate stressed accounts will attract stern supervisory or enforcement actions, including higher provisioning on such accounts and monetary penalties.
