The Reserve Bank of India (RBI) has decided to set up a committee under KV Kamath for looking into one-time restructuring of loans and financial parameters needed to be factored into resolution plans. RBI says the move has been announced in a bid to provide relief to stressed companies which have not been able to repay loans due to cash-flow issues amid the pandemic, and it will issue final notification in this regard after considering the Kamath committee recommendations.
In his video address, RBI governor Shaktikanta Das says, "The Reserve Bank is constituting an Expert Committee (chairman: KV Kamath), which shall make recommendations to the RBI on the required financial parameters, along with the sector specific benchmark ranges for such parameters, to be factored into resolution plans. The expert committee will also undertake a process validation of resolution plans for borrowal accounts above a specified threshold."
Mr Kamath is former chairman of BRICS Bank and ICICI Bank.
The panel led by Mr Kamath has members like Diwakar Gupta, vice president of Asian Development Bank and TN Manoharan, chairman of Canara Bank, Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services LLP as strategy advisor and Indian Banks' Association (IBA)'s chief executive, who would act as member-secretary.
Mr Gupta would join the panel from 1 September 2020 after completing his term at ADB. Mr Manoharan will be on the panel from 14 August 2020, after completion of his term as Canara Bank's chairman.
At present, Sunil Mehta, former managing director (MD) and CEO of Punjab National Bank (PNB) is the chief of IBA.
RBI says, the economic fallout on account of the COVID-19 pandemic has led to significant financial stress for a number of borrowers across the board.
"The resultant stress can potentially impact the long-term viability of a large number of firms, otherwise having a good track record under the existing promoters, due to their debt burden becoming disproportionate, relative to their cash flow generation abilities. Such wide spread impact could impair the entire recovery process, posing significant financial stability risks," it added.
Considering this situation, Mr Das, the RBI governor says, "with the intent to facilitate revival of real sector activities and mitigate the impact on the ultimate borrowers, it has been decided to provide a window under the prudential framework to enable the lenders to implement a resolution plan in respect of eligible corporate exposures without change in ownership, and personal loans, while classifying such exposures as standard subject to specified conditions. Such conditions are considered necessary to ensure that the facility of this resolution window is available only to the COVID-19 related stressed assets. Besides, the crucial aspect of maintaining financial stability has also been suitably factored in."
As per RBI, necessary safeguards are being incorporated, including prudent entry norms, clearly defined boundary conditions, specific binding covenants, independent validation and strict post-implementation performance monitoring.
It says, "Given the intent to facilitate revival of real sector activities and mitigate the impact on the ultimate borrowers, the framework will not be available for exposures to financial sector entities as well as central and state governments, local government bodies (e.g. municipal corporations) and anybody corporate established by an act of Parliament or state legislature."
Here are the key features of the resolution framework for exposures other than personal loans:
1. Only those borrower accounts shall be eligible for resolution under this framework which were classified as standard, but not in default for more than 30 days with any lending institution as on 1 March 2020. Further, the accounts should continue to remain standard till the date of invocation. All other accounts, as hitherto, may be considered for resolution under the 7th June Prudential Framework, or the relevant instructions as applicable to specific category of lending institutions where the Prudential Framework is not applicable.
2. The resolution plan may be invoked anytime till 31 December 2020 and will have to be implemented within 180 days from the date of invocation.
3. Lenders shall have to keep additional provisions of 10% on the post-resolution debt.
4. In order to enforce collective action, specific voting thresholds are being prescribed even for invocation of the resolution plan; and those lending institutions not signing the inter-creditor agreement (ICA) within 30 days from the date of invocation shall attract higher provisions of 20.
5. Post-implementation, the asset classification of the account shall be retained as standard, or if the account had slipped into NPA after invocation but before implementation, the asset classification shall be restored upon implementation.
6. RBI is constituting an expert committee (chairman: KV Kamath) which shall make recommendations to the RBI on the required financial parameters, along with the sector-specific benchmark ranges for such parameters, to be factored into each resolution plans. The final notification in this regard shall be issued by RBI after considering the recommendations.
7. The expert committee shall also undertake a process validation of resolution plans for accounts above a specified threshold.
8. The lending institutions may allow extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years.
9. Wherever the resolution plans involve conversion of a portion of debt into equity and other debt instruments, the debt instruments with terms similar to the loan shall be counted as part of the post-resolution debt, whereas the portion converted into other non-equity instruments shall be fully written down.
10. In respect of accounts involving consortium or multiple banking arrangements, all receipts by the borrower; all repayments by the borrower to the lending institutions; as well as all additional disbursements, if any, to the borrower by the lending institutions as part of the resolution plan, shall be routed through an escrow account maintained with one of the lending institutions.
For personal loans, RBI says a separate framework is being prescribed and the resolution plan for personal loans under this framework may be invoked till 31 December 2020 and will be implemented within 90 days thereafter.
"The lending institutions are, however, encouraged to strive for early invocation in eligible cases. The timelines for implementation of resolution plan in case of personal loans are assessed to be adequate since, unlike larger corporate exposures, there will not be any requirement for third party validation by the expert committee, or by credit rating agencies, or need for ICA. The contours of the plan may be decided based on the board approved policies of the lenders subject to extension of the residual tenor of the loan, with or without payment moratorium, by a period not more than two years," it added.