In a discussion paper on framework for revitalising distressed assets, the RBI has proposed several measures including making future borrowing expensive for defaulters and setting up a central repository for collecting information on large credits

Reserve Bank of India (RBI) has released a discussion paper on framework for revitalising distressed assets or non-performing assets (NPAs). The discussion paper outlines a corrective action plan that will incentivise early identification of problem cases, timely restructuring of accounts which are considered to be viable, and taking prompt steps by banks for recovery or sale of unviable accounts. The paper also talks about making future borrowing more expensive for borrowers who do not cooperate with lenders.

Under the proposals, RBI will set up a Central Repository of Information on Large Credits (CRILC) to collect, store, and disseminate credit data to lenders. Before a loan account turns into an NPA, banks should identify incipient stress in the account by creating a new sub-asset category, special mention accounts (SMA) in line with instructions issued by RBI.

"Banks will have to furnish credit information to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs5 crore and above. While all scheduled commercial banks will mandatorily contribute their credit information on their borrowers/ customers as above, systemically important non-banking financial companies (NBFC-SI) will also be asked to furnish such information. In addition, banks will have to furnish details of all current accounts of their customers with outstanding balance (debit or credit) of Rs1 crore and above," the central bank said.

Banks will be required to report, among others, the SMA status of the borrower to the CRILC. Reporting of an account as SMA-2 by one or more lending banks/ NBFC-SIs will trigger the mandatory formation of a Joint Lenders’ Forum (JLF) and formulation of Corrective Action Plan (CAP).

RBI said, "With a view to limiting the number of JLFs to be formed, it is proposed that JLF formation would be made mandatory for distressed corporate borrowers, engaged in any type of activity, with aggregate fund based and non-fund based exposure of Rs100 crore and above. Lenders, however, have the option of formation of JLFs even when the aggregate fund-based and non-fund based exposures in an account are less than Rs100 crore."

To resolve the stress in the account, the JLF may explore various options like rectification, restructuring and recovery. "Wilful defaulters will normally not be eligible for restructuring. However, the JLF may review the reasons for classification of the borrower as a wilful defaulter and satisfy itself that the borrower is in a position to rectify the wilful default. The decision to restructure such cases should however also have the approval of the board/s of individual bank/s within the JLF who have classified the borrower as wilful defaulter," RBI said.

Here are the main proposals in the paper titled, ‘Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy’...

• • Early formation of a lenders’ committee with timelines to agree to a plan for resolution.
   

• • Incentives for lenders to agree collectively and quickly to a plan – better regulatory treatment of stressed assets if a resolution plan is underway, accelerated provisioning if no agreement can be reached.
   

• • Improvement in current restructuring process: Independent evaluation of large value restructurings mandated, with a focus on viable plans and a fair sharing of losses (and future possible upside) between promoters and creditors.
   

• • More expensive future borrowing for borrowers who do not co-operate with lenders in resolution.
   

• • More liberal regulatory treatment of asset sales.
   

• • Lenders can spread loss on sale over two years provided loss is fully disclosed.
   

• • Takeout financing/refinancing possible over a longer period and will not be construed as restructuring.
   

• • Leveraged buyouts will be allowed for specialised entities for acquisition of ‘stressed companies’.

• • Steps to enable better functioning of Asset Reconstruction Companies mooted.

• • Sector-specific Companies/Private equity firms encouraged to play active role in stressed assets market.

Going forward, RBI said, "While some regulatory and governmental measures may be required to address the factors that are leading to deteriorating asset quality, there is an equal need for proper credit discipline among lenders."

Comments on the Discussion Paper may be sent to the Principal Chief General Manager, Reserve Bank of India, Department of Banking Operations and Development, Central Office, 12th Floor, Central Office Building, Shahid Bhagat Singh Marg, Mumbai-400 001 or emailed to [email protected] by 1 January 2014.