RBI grants banks one-time window to recast loans in sectors under stress due to Covid

The Reserve Bank of India (RBI) on Thursday decided to grant banks a one-time window to recast corporate loans, which will help cap the sharp rise in bad loans. The boundaries and parameters for this one-time loan recast would be set by a committee headed by veteran banker and former chief of Brics Bank KV Kamath. This window has been granted to help revive activities in the stressed sectors and mitigate the impact on ultimate borrowers, which could have been impacted by the pandemic. This debt recast window would come under the prudential framework of RBI’s June 7, 2019, circular.

Under this window, banks would be able to restructure corporate loans, extend loan tenor, sanction additional credit and also allow a moratorium of up to two years.  Lenders would need to provide 10% against loans that would be recast under this window. In a bid to prevent misuse of this window, the central bank said “…necessary safeguards are being incorporated, including prudent entry norms, clearly defined boundary conditions, specific binding covenants, independent validation and strict post-implementation performance monitoring.”

The KV Kamath Committee would make recommendations on the required financial parameters, along with the sector specific benchmarks to be factored into each resolution plans. This committee will also be vetting resolution plans where debt is more than `1,500 crore. The resolution under this framework may be invoked not later than December 31, 2020 and must be implemented within 180 days from the date of invocation, RBI said.

RBI has made it clear that the facility would be available for ‘standard’ accounts and reference date for the outstanding debt shall be March 1, 2020. “The resolution under this facility is provided only to the borrowers having stress on account of Covid-19,” RBI governor Shaktikanta Das said.

Lenders would need to sign an inter-creditor agreement (ICA) for resolving account with the consent of minimum 75% creditors by value, or 60% by numbers. The framework mandates ICA to be signed by all lending institutions within 30 days from the date of invocation. The regulator has also mandated provisioning of 20% for lenders who do not sign ICA within the said period.

RBI has also allowed conversion of debt into securities, as part of the resolution. According to framework, the conversion to any other non-equity instrument will lead to the value of that portion of debt being written down to `1.
“In case the lending institutions convert any portion of the debt into any other security, the same shall collectively be valued at Rs 1,” RBI said.

Lending institutions have been directed by RBI to make disclosure of the restructured borrowers in a prescribed format during quarterly earnings. Lenders need to make disclosures from March, 2021 quarter. The expert committee formed by RBI will keep a check on the implemented resolution plan by the lenders.

RBI said that the expert committee would have the responsibility of vetting the resolution plan of all accounts where the aggregate exposure is Rs 1,500 crore and above. The committee shall check and verify that all the processes have been followed by the parties concerned as desired without interfering with the commercial judgments exercised by the lenders.

Confederation of Indian Industry (CII) president Uday Kotak said, “It is to be hoped that the expert committee led by K V Kamath will come out with norms that will enable banks to judiciously monitor businesses while enforcing timely payments as per the restructuring plan.” The sectors that are highly stressed due to the impact of Covid-19 are in dire need of such restructuring, he said.

Indian Banks’ Association (IBA) chairman Rajnish Kumar, who also heads State Bank of India (SBI), said that the RBI has carefully addressed the concerns emanating from the wider market participants. “Notably, the RBI has addressed the need to offer some form of restructuring facility for standard accounts that are facing difficulty in debt restructuring,” he said.

Krishnan Sitaraman, senior director, Crisil Ratings, said that RBI’s announcement of a series of measures will help soften the impact of the Covid-19 pandemic on both banks as well as borrowers on the twin dimensions of controlling rise in non-performing assets (NPAs) and supporting credit flow. “The relaxations permitted under the June 2019 prudential framework on resolution of stressed assets subject to certain conditions being fulfilled will limit the rise in NPAs in the banking system in the near to medium term,” he further said.