RBI’s One-Stop Shop The Final Step For Resolving India’s Bad Loans?

CDR, SDR, JLF, S4A – in the last 15 years, the Reserve Bank of India introduced several schemes to help restructure corporate debt. But there were few successes.

In 2016, the parliament enacted the Insolvency and Bankruptcy Code that laid down clear processes and tight deadlines for insolvency resolution and liquidation. Even that didn't move lenders or corporate borrowers much… till in June 2017 when the RBI ordered banks to file insolvency cases against 12 largest non-performing accounts. Suddenly, the threat of insolvency and liquidation made the mouthful of restructuring schemes more attractive. Until Feb. 12, when the RBI suddenly pronounced these schemes dead.

This framework is different from the earlier schemes on at least three counts:

• Under each of the earlier schemes a company could be restructured on fulfilling certain conditions and specified circumstances. The revised scheme gives the lenders flexibility to restructure the company's debt in any manner. For instance, restructuring under S4A was only applicable to projects that have begun operations. There is no such requirement under the new scheme.
• The earlier schemes primarily catered to domestic financial creditors. The new one seeks to include all scheduled banks and financial institutions, except regional rural banks.
• It also includes a stringent 180-day timeline for implementation of restructuring, failing which lenders in case of debt over Rs 2,000 crore will have to resort to IBC. On the other hand, restructuring timelines in the earlier regimes were not as stringent nor the consequences as drastic.

Given the complexities associated restructuring, which is consensual, bilateral and requires a number of stakeholders to work together, it is going to be a tough task to achieve any restructuring under the new scheme, specially with a minimum level of credit rating and specially within a short time frame of six months, L Viswanathan, partner at law firm Cyril Amarchand, told BloombergQuint.

Also Read: BQExplains: What RBI's New Bad Loan Resolution Framework Means

Lack of Transitionary Period

Experts feel that the lack of transitionary period in replacing all earlier restructuring schemes with a whole new framework may cause a few hiccups, at least for the top 40-50 most stressed companies that were at the last stages of trying to restructure their loans under the S4A or SDR mechanism.

This new framework has been introduced suddenly and provided no transition period for companies or banks, Kunaal Shah, partner at law firm Trilegal told BloombergQuint.

New Procedural Requirements

Under the new framework, in the case of a company with debt of over Rs 100 crore, the debt will have be independently evaluated by an authorised credit rating agency. Companies with debt of over Rs 500 crore will need two such evaluations.

Also – if a restructuring under the revised scheme involves change in ownership of the debtor company, then the new owner must be eligible under Section 29A of the Insolvency and Bankruptcy Code. 29A is the section that debars wilful defaulters, promoters of non-performing assets and persons connected to them for purchasing those assets. If the acquirer doesn't meet the criteria, then the lending bank will not be able to upgrade the loan account to standard – which may prevent the bank from accepting such a restructuring.

This provision seems to be an extension of the IBC law to a situation when the company has not been even taken to insolvency which is a little harsh, Shah said. There could be various promoters across different sectors who may have one particular company in insolvency, and this debars them from participating in restructuring even prior to IBC, which is not fair, he said.

The provision has impacted several restructuring schemes that were near closure prior to the introduction of the revised framework.

With the new framework in place, there are still companies trying to complete the restructuring process but the parameters are pretty strict and the timelines are very tight as well, Viswanathan said.

Good News

There's also a view that the combination of the revised framework and the IBC could spell good news for sophisticated buyers of stressed assets.

This is great opportunity for stressed funds and strategic investors who earlier did not invest in these markets simply because they did not have determinant timeline within which they could acquire the stressed assets, Shah said.