RBI's norms for distressed assets with riders

Allows use of counter-cyclical provisions for meeting shortfall in NPA-sale

The Reserve Bank of India (RBI) on Wednesday notified the rules for forming a Joint Lenders' Forum and adopting a Corrective Action Plan for distressed assets. The central bank also put certain riders for refinancing project loans and the sale of non-performing assets (NPAs).

The guidelines - Framework for Revitalising Distressed Assets in the Economy - will become operational from April 1. These include measures such as accelerated provisioning. It means, if banks conceal the actual status of certain accounts, those accounts will face accelerated provisioning by RBI. In order to ensure better chances of reconstruction of stressed assets, a financial asset may be sold to the securitisation company (SC) / reconstruction company (RC) where the asset is reported as a special mention account and the principal or interest payment is overdue by 61-90 days.

According to RBI, banks using the auction process for sale of NPAs to SCs/RCs should be more transparent, including disclosure of the reserve price, specifying clauses for non-acceptance of bids. If a bid received is above the reserve price and a minimum of 50 per cent of sale proceeds is in cash, and also meets the conditions in the offer document, acceptance of that bid would be mandatory.

Banks will be permitted to sell their NPAs to other banks and finance companies without any initial holding period. However, the non-performing financial asset should .be held by the purchasing bank for at least 12 months before it is sold.

With respect to the use of counter-cyclical or floating provision, RBI said banks can use such provisions for meeting any shortfall on sale of NPA - that is when the sale is at a price below the net book value.

In case of troubled companies, RBI said banks can extend finance to 'specialised' entities (those set up for taking and turning around stressed units) subject to the certain conditions. The lenders should, however, assess the risks associated with such financing and ensure the entities are adequately capitalised. The debt-equity-ratio for such entity is not more than 3:1.

On credit risk management, RBI said lenders should ascertain the source and quality of equity capital brought in by the promoters / shareholders. "Multiple, especially in infrastructure projects, is a matter of concern as it effectively camouflages the financial ratios such as debt / equity ratio, leading to adverse selection of the borrowers," the central bank noted.

"Therefore, lenders should ensure at the time of credit appraisal that debt of the parent company is not infused as equity capital of the subsidiary or SPV (special purpose vehicle)," the regulator added.

With a view to discouraging borrowers or defaulters from being unreasonable and non-cooperative with lenders in their resolution / recovery efforts, RBI has said banks can classify such borrowers as non-cooperative borrowers, after giving them due notice if satisfactory clarifications are not furnished.