For India Inc, 30-day grace after loan default comes as a major relief

The Reserve Bank of India (RBI) has dropped the one-day default rule and given a 30-day breather to lenders for review of the borrower account. 
 

According to the revised norms on stressed assets issued by the RBI on Friday, lenders can review a borrower account within 30 days of default. Earlier, the banks had to start resolution within one day of default. 

The chief financial officer of an engineering, procurement and construction (EPC) company said the one-day default rule was a huge headache for companies, as it would trigger a rating downgrade, which, in turn, would impact borrowing cost and the image of the company. “From one day to a 30-day window is significant.” 

On February 12, 2018, the RBI had issued a circular under which banks were asked to initiate resolution or restructuring of loans of Rs 2,000 crore or more if there was a single day of default. The Supreme Court had, however, struck down the circular, terming it “ultra vires”. 

According to the circular, if a resolution was not worked out within 180 days, banks were asked to initiate insolvency. 

According to the latest norms, if a resolution plan is not implemented within 180 days, then banks will have to make an additional 20 per cent provisioning and if it doesn’t happen in 365 days, they will provide for an additional 15 per cent. 

“This is a relief for existing promoters as the sword of the Insolvency and Bankruptcy Code (IBC) would not be hanging over their heads in the immediate term,” the EPC executive said. 

Also, the resolution plan will have to be approved by 75 per cent of the creditors by value as opposed to 100 per cent earlier. 

But the chief executive of a telecom company pointed out that in cases where the resolution plan is to be implemented, all lenders would have to enter an inter-creditor agreement (ICA) during the review period to provide for ground rules for finalisation and implementation of the plan in respect of borrowers with credit facilities from more than one lender. The 75 per cent threshold would therefore become futile. 

According to the revised framework, the ICA would provide that any decision agreed by lenders representing 75 per cent by value of total outstanding credit facilities and 60 per cent of lenders by number would be binding on lenders. 

A steel company CEO, however, pointed out that there were no specific guidelines in the revised norms for the resolution plan, unlike the corporate debt restructuring (CDR) scheme. Also, getting two positive rating for the resolution plan was a hurdle. 

But Icra Vice-President Abhishek Dafria said complete freedom was provided on the framework for resolution plan. He also said the prudential framework would de-clog the National Company Law Tribunal and in a way help clear the IBC cases. 

L Viswanathan, Partner, Cyril Amarchand Mangaldas said the core of February 12 circular remains intact. The stipulated requirement of creditors consent for a resolution plan as 75 per cent by value and 60 per cent by number, which is higher than IBC which prescribes 66 per cent or two-thirds. “This increased period to implement a resolution from 180 to 365 days with dis-incentive of additional provisioning though it incentivises IBC references by creditors by permitting reversal of additional provisioning.  Intercreditor Agreement mandatory amongst banks, financial institutions NBFCs and ARCs, which also contemplates protection for dissenting creditors,” he said.