The Reserve Bank of India (RBI) issued a revised prudential framework for resolution of stressed assets on 7 June 2019 (Revised Circular) in supersession of the erstwhile circular on Resolution of Stressed Assets dated 12 February 2019 (Feb 12 Circular) which was struck down by the Hon'ble Supreme Court on 2 April 2019.
The Supreme Court had found fault with the Feb 12 Circular primarily on the ground that a universal and mandatory reference of accounts to proceedings under the insolvency code where the aggregate exposure was greater than INR 2000 crores and where the resolution was not implemented within 180 days, was ultra vires the powers of RBI. However, the Court held that such reference of defaulting borrower can be directed by RBI on a case-to-case basis having regard to the specific defaults.
After the Supreme Court judgment, the RBI at the time of issuance of the Revised Circular also issued a press release clarifying that in the purpose clause of the Revised Circular that "Notwithstanding anything contained in this framework (i.e. the Revised Circular), wherever necessary, RBI will issue directions to banks for initiation of insolvency proceedings against borrowers for specific defaults so that the momentum towards effective resolution remains uncompromised."
As such, it is noteworthy that apart from the operation of the Revised Circular (summarized below), the RBI has reserved its power to issue specific directions to banks/financial institutions to refer a defaulting borrower to the resolution process under IBC in terms of Section 35AA of the Banking Regulation Act 1849.
The Revised Circular applies to Scheduled Commercial Banks (SCB), All India Term Financial Institutions (AITFI), Small Finance Banks (SFB), NBFC-ND-SI and NBFC-D. It is not applicable to regional rural banks, FCCB holders etc.
Lenders are required to adopt a board approved policy for resolution of stressed assets with timelines for resolution. This policy is required to outline the signs of financial difficulty and set out qualitative and quantitative criteria for determination of such financial difficulty.
Pre-emptive measures i.e. active steps to initiate and implement a resolution plan even before a default has actually occurred are expected of lenders. In case a default has occurred, and the lender is a SCB, SFB or AITFI, they are required to undertake a review of the borrower within 30 days of such default (Review Period).
A resolution plan (RP) under the Revised Circular is required to be implemented within 180 days from the end of the Review Period - if the lenders have decided to pursue a restructuring (rather than a reference to insolvency proceedings under the IBC) . A Review Period will commence on the earlier of the reference date (if the Borrower has defaulted on or before the reference date) or on the date of first default after the reference date. The reference dates are as per the below:
Aggregate exposure of the Borrower to SCBs, SFBs and AITFI Reference Date INR 20 billion and above 7 June 2019 INR 15 billion up to INR 20 billion 1 January 2020 Less than INR 15 billion To be announced by RBI Implementation of RP