With the introduction of the circular on ‘Resolution of Stressed Assets – Revised Framework’ dated 12 February 2018 (RBI/2017-18/131 DBR.No.BP.BC.101/21.04.048/2017-18) (New Restructuring Framework), the Reserve Bank of India (RBI) officially kicked off an entirely new phase in its efforts to reform a banking system ridden with non-performing assets (NPAs). Up until now, the RBI’s strategy had been heavily focussed on restructuring as the optimal solution – initially through the completely voluntary mechanism of Corporate Debt Restructuring (CDR), and later through the mandatory mechanism of the Joint Lenders’ Forum (JLF) mechanism and several restructuring options that were offered to lenders under its umbrella. The Strategic Debt Restructuring (SDR) and Outside Strategic Debt Restructuring (OSDR) schemes aimed at replacing the promoter as a negative incentive to promote credit discipline, while the Scheme for Strategic Structuring of Stressed Assets (S4A) sought to strike a balance, providing the lenders with more customisable restructuring options with or without replacing the promoters at their discretion. The Flexible Structuring of Existing Long Term Project Loans (5:25 Scheme) was sought to address the stress associated with project financing and sought to give lenders more flexibility in dealing with the long commercial gestation periods that are typical to project finance as well as the asset-liability mismatch emanating at the time of origination of such loans. However, in spite of all the options, restructuring yielded up very few cases of successful recovery among the high-value defaults which comprised the bulk of NPAs in the system and the NPA profile of the banks was mounting up. In this environment, the Insolvency and Bankruptcy Code 2016 (IBC) became a sudden game-changer, providing a tightly time-bound statutory mechanism in which a company’s debts would either be resolved to the satisfaction of a majority of its creditors, or the company wound up, in a matter of around six months. Since its inception in late 2016, it has yielded impressive results, with the RBI itself instructing banks to mandatorily refer the highest value NPAs to the relevant National Company Tribunal (NCLT) for the corporate insolvency resolution process (CIRP) under the IBC. With the introduction of the New Restructuring Framework, the RBI has now withdrawn all existing modes of restructuring (including CDR, SDR, OSDR, S4A, the 5:25 Scheme and the JLF mechanism altogether), leaving only a generic restructuring option which has to be successfully worked out in six months, or the mandatory invocation of the CIRP.
Salient Features of the New Restructuring Framework
An RP would be considered to be ‘implemented’ when:
If there has been any default during the specified period, then the lenders are required to initiate CIRP within 15 days from the date of default.
The RBI has also stated that over a period of the next two years, it would adopt a similar policy to resolve all accounts from between INR 100 crore till INR 2000 crore as well.
Restructuring Norms – Key Highlights
The New Restructuring Framework appears to be intended to supplement the IBC and designate CIRP as the optimal resolution mechanism for all high value loans in default. A key feature of the New Regulatory Framework is that it does not make it mandatory for all lenders to participate in the process of working out a unified RP which would become binding on all lenders upon receiving a majority assent. This would mean that unless the lenders unanimously consent to an RP and are able to implement it within the fairly aggressive timelines, the borrower would necessarily be subjected to the CIRP. While this move will definitely upset the status quo in the loan market over the next six months as banks rush to implement the timelines, it recognises the fact that the IBC has in its short history achieved much more than all the previous restructuring schemes put together, which did not see much success due to its voluntary nature and conflicting interests. In the longer run, the New Restructuring Framework would go a long way in instilling stringent credit discipline among both borrowers and lenders and potentially alter borrowing and lending patterns at a macroeconomic level.