Mumbai: The Reserve Bank of India (RBI) on Monday tightened norms for bad loan resolution by setting timelines for resolving large NPAs, failing which banks will have to mandatory refer them for insolvency proceedings. It also withdrew existing debt restructuring schemes such as SDR and S4A.

RBI has issued definitions of different resolution plans and an indicative list of financial difficultly, and directed lenders to share data on certain defaulted borrowers with the central bank’s database on large exposures on every Friday.

The large accounts are mainly those where banks have initiated resolution and are classified as restructured standard assets. Indian banks are sitting on a stressed assets pool of over Rs10 trillion.

According to the new rules, for such accounts, where the banking sector’s aggregate exposure is Rs2,000 crore above, lenders must implement a resolution plan within 180 days, starting 1 March 2018.

“If a RP (resolution plan) in respect of such large accounts is not implemented as per the timelines specified, lenders shall file insolvency application, singly or jointly, under the Insolvency and Bankruptcy Code 2016 (IBC) within 15 days from the expiry of the said timeline," the RBI said in notification issued late on Monday.

This circular comes at a time when banks are finalizing resolution plans for 11 of the 12 accounts in RBI’s first defaulter list under the insolvency and bankruptcy code. They are also filing insolvency petitions for some of the 28 accounts which were part of central bank’s second defaulter list.

The central bank has warned banks that they will be penalised for failure to adhering the timelines.

“Any failure on the part of lenders in meeting the prescribed timelines or any actions by lenders with an intent to conceal the actual status of accounts or evergreen the stressed accounts will be subjected to stringent supervisory / enforcement actions as deemed appropriate by the Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary penalties," it said.

In case the resolution plan involves change in the ownership structure of the defaulting firm, RBI has mandated that account should not be in default at any point during the specified period.

Specified period is the time between implementation of the plan and the date, where up to 20% of the outstanding principal debt is repaid.

If there is a default in the specified period, the account must be referred for IBC proceedings, RBI said. “Banks shall conduct necessary due diligence in this regard and clearly establish that the acquirer is not a person disqualified in terms of Section 29A of the IBC," the central bank said.

RBI said that for other accounts with aggregate exposure below Rs2,000 crore but and, at or above Rs100 crore, it intends to announce, over a two-year period, reference dates for implementing the resolution plans to ensure calibrated, time-bound resolution of all such accounts in default.

“It is, however, clarified that the said transition arrangement shall not be available for borrower entities in respect of which specific instructions have already been issued by the Reserve Bank to the banks for reference under IBC. Lenders shall continue to pursue such cases as per the earlier instructions," the RBI said.

Banks must also vet the resolution plan through credit rating agencies for independent credit evaluation (ICE) of residual debt. Accounts with aggregate exposure of Rs500 crore there must require two such ICEs, and one for in other cases.

With new norms, all regulatory guidelines pertaining to restructuring of loans under different schemes of the central bank such as strategic debt restricting (SDR), 5/25 refinancing, and Scheme for Sustainable Structuring of Stressed Assets (S4A), among others, stand withdrawn with immediate effect, RBI said.

“Accordingly, the Joint Lenders’ Forum (JLF) as an institutional mechanism for resolution of stressed accounts also stands discontinued. All accounts, including such accounts where any of the schemes have been invoked but not yet implemented, shall be governed by the revised framework," RBI said.

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