The Reserve Bank of India (RBI) on Thursday decided to give banks a one-stop window to overhaul corporate lending, which will help limit the sharp rise in bad debts. The limits and parameters of this single loan overhaul would be set by a committee headed by a seasoned banker and former head of Brics Bank KV Kamath. This window was granted to help revive activities in stressed sectors and mitigate the impact on end borrowers, who could have been impacted by the pandemic. This debt overhaul window would be part of the prudential framework of the RBI circular of June 7, 2019.

Under this window, banks could restructure loans to businesses, extend loan terms, authorize additional loans and also authorize a moratorium of up to two years. Lenders are expected to provide 10% of the loans which would be recast in this window. In an effort to prevent the misuse of this window, the central bank said that “… the necessary guarantees are incorporated, including prudent entry standards, clearly defined limit conditions, specific binding commitments, independent validation and strict monitoring of performance after implementation “.

The KV Kamath committee would make recommendations on required financial parameters, as well as sector-specific references to be considered in each resolution plan. This committee will also review resolution plans when debt is greater than 1,500 crore. The resolution in this framework can be invoked no later than December 31, 2020 and must be implemented within 180 days of the invocation date, RBI said.

The RBI has made it clear that the facility will be available for “standard” accounts and that the reference date for outstanding debt will be March 1, 2020. “Resolution under this facility is provided only to stressed borrowers at cause of Covid-19, “said RBI Governor Shaktikanta Das.

Lenders should sign an intercreditor agreement (ICA) to resolve the account with the consent of at least 75% of creditors in value, or 60% in number. The framework requires that the ICA be signed by all credit institutions within 30 days of the invocation date. The regulator has also imposed a 20% provisioning for lenders who do not sign the ICA within the aforementioned deadline.

The RBI also authorized the conversion of debt into securities, as part of the resolution. According to the framework, conversion to any other instrument other than equity will reduce the value of that part of the debt to “1.
“In the event that lending institutions convert part of the debt into any other security, it will collectively be valued at Rs 1,” RBI said.

Credit institutions have been ordered by RBI to disclose restructured borrowers in a prescribed format during quarterly results. Lenders must make disclosures from the March 2021 quarter. The expert committee formed by RBI will monitor the resolution plan implemented by the lenders.

RBI said the expert committee would be responsible for verifying the resolution plan of all accounts where the global exposure is Rs 1,500 crore and above. The committee checks and verifies that all processes have been followed by the parties involved as desired without interfering with the business judgments exercised by the lenders.

Confederation of Indian Industry (CII) President Uday Kotak said: “Hopefully the expert committee led by KV Kamath will come up with standards that will allow banks to judiciously monitor businesses while enforcing the standards. timely payments in accordance with the restructuring plan. Sectors that are very stressed due to the impact of Covid-19 are in urgent need of such restructuring, he said.

The President of the Association of Indian Banks (IBA), Rajnish Kumar, who also heads National Bank of India (SBI), said the RBI has carefully addressed concerns from broader market participants. “Notably, the RBI has responded to the need to offer some form of restructuring facility for standard accounts that are having difficulty in debt restructuring,” he said.

Krishnan Sitaraman, senior director of Crisil Ratings, said the RBI’s announcement of a series of measures will help mitigate the impact of the Covid-19 pandemic on both banks as well as borrowers on the dual dimension controlling the rise in non-productive assets (NPA) and supporting credit flows. “The relaxations authorized in the prudential framework of June 2019 on the resolution of stressed assets subject to certain conditions being met will limit the increase in NPAs in the banking system in the short and medium term,” he added.