How Proper Implementation Of Loan Restructuring Plan Will Help Corporate And MSME Sectors
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The COVID-19 pandemic has been devastating for the economy as a whole, the entire population across the globe has been severely affected, severity may, however, vary in different economies. India is no exception to the impact. Though to contain the effect, the government announced a relief package of over INR 20 lakh crore, but the elongated impact of the COVID-19 has a spiral downward impact on the economic activity. The Reserve Bank of India (RBI) in its latest monetary policy release accepted that various sectors still have negative growth, though the rate of deceleration has fallen and less severe as compared to the previous quarter.
Considering the severity of the situation, RBI came up with a one-time restructuring framework on August 6, 2020, for COVID-19 related stress. While the MSMEs having exposure upto INR 25 crore are covered under the existing restructuring scheme which has been extended by three months from Dec 31, 2020 to March 31, 2021, the other entities (including MSME having exposure over INR 25 crore) are covered under the new framework. Though the framework, as an exception and considering the impact, covers the stress on the individual finances as well, however, we restrict our discussions to the business related stress and its resolution.
The framework was much awaited for the stressed business entities, which are still unsure of the revival timelines. The framework provides an opportunity to the lenders to decide on the restructuring package within the broad guidelines and the timelines for implementation. The framework has following characteristics:
- There is a major depart from the earlier (June 2019) guidelines, the account either remain standard or is upgraded to standard on implementation.
- Available only to borrowers having stress caused by COVID-19 to be decided by the lenders under Board approved policies for due diligence and eligibility.
- Mandatory Inter Creditor Agreement (for Multiple LIs) also incentivizes by way of low provisioning for ICA signatories.
- Expert Committee of RBI to recommend financial parameters including sector specific benchmarks, as notified by RBI, to be considered in the RP and also entrusted with the responsibility of review of RP having a pre-restructuring debt of INR 1,500 crore or more.
- Independent credit evaluation by credit rating agencies for exposures of INR 100 crore or more.
- Permits additional funding including interim funding after consent by the lenders and borrower for implementation of RP.
- Escrow account mechanism with escrow manager to have enforcement powers for timely disbursement of additional credit facilities (if any) by lenders.
In order to be eligible under the framework, the account should be “Standard Asset” as on March 1, 2020, and should not be more than 30 days overdue and continues to be standard till the Invocation of the framework. Invocation means that the lenders and the borrower agree on the implementation of restructuring under the Framework. The framework though provides a time-bound restructuring, however, it fails to provide time lines on two counts: review by expert committee and evaluation by credit rating agency.
These may lead to insufficient time for revision and implementation considering the volume of restructuring proposals expected to be processed by the Banks, credit rating agencies and the expert committee and the iterative process.
Formation of the expert committee by RBI to suggest some basic and some industry specific financial parameter and the range thereof. RBI shall notify the parameters within 30 days and such parameters are to be included in each resolution plan. Such defined parameters bring objectivity to the resolution plan and also the clarity for the proposer and also the approval thereof. Further, review of resolution plans with large exposure by the expert committee brings fairness and a mechanism whereby the RP is reviewed by experts of diverse fields. Moreover, though the framework does not mandate any credit rating, it requires the resolution plans where the exposure is INR 100 crore and above, to have an independent credit evaluation by a credit rating agency. Hence the resolution plans are subject to credit scrutiny. These requirements/features reduce undue subjectivity to the resolution plans and also increased acceptability by the lenders.
It is pertinent that the lenders have guidelines with ample clarity and adequate empowerment for the branch/zonal/regional level officers with proper safeguards and incentives for effective implementation of the framework. The Framework intends to take the stressed business entities out without much affecting the balance sheets of the lenders and the powers have been vested with the respective lenders for its proper implementation. The onus now is on the lenders to have unambiguous guidelines within the framework, to ensure proper implementation in the spirit of the Framework.
Addressing the resolution of stressed MSME accounts having exposure upto INR 25 crore, the Reserve Bank of India, has not only extended the validity of its notification dated February 11, 2020, by three months but also the scheme is now implementable upto March 31, 2021, vide its notification dated August 6, 2020. It is noteworthy, that in case of MSME, the limit of 30-day default is not applicable, hence the account can be in default but should not have been classified as NPA by any of the lenders. One more highlight of the said notification is that in case any MSME account slips to NPA from March 2, 2020, to date of implementation, the account shall be upgraded to standard on implementation of a restructuring plan. It is further important to note that the concept of Invocation is not applicable in case of such accounts.
Having said the above, the borrowers in the present case also need to be pragmatic and should propose the achievable resolution plan with clear visibility and adequate margins for any kind of stress/ adverse change in the business environment.