RBI’s new diktat on bank default: It is time for promoters to face the heat
The Reserve Bank of India on Monday ordered a complete overhaul of the stressed asset resolution mechanism, subsuming 28 existing schemes to ensure a uniform and time-bound recognition of non-performing assets and its resolution. The new 20-page diktat clearly lays down the process, leaving no room for interpretation, analysts said. While the RBI fixes a strict deadline for lenders to identify, restructure and refer under IBC the defaults, it also makes promoters face the heat under the new guidelines.
Banking Secretary Rajeev Kumar told ET Now that the new framework by the RBI is a “wake-up” call for defaulters to pay-up within the 180-day deadline or face the axe of insolvency under the Insolvency and Bankruptcy Code (IBC). The RBI has notified that for large accounts with an exposure of Rs 100 crore and more to lenders will get an upgrade only on the demonstration of satisfactory performance and an investment grade BBB- or better.
For an exposure of more than Rs 500 crore, ratings of two RBI-accredited rating agencies will be considered and in case of difference of opinion, lower rating will be taken into account. However, what really makes promoters face the heat is the fact that under ‘Change of Ownership’ clause for an upgrade, the RBI has borrowed that Section 29 A of the IBC, which bars wilful defaulters and defaulting promoters from the resolution process.
If the change in ownership is implemented under this framework, then the classification as ‘standard, will require banks to clearly establish that the “acquirer is not a person disqualified in terms of Section 29A of the IBC. The Section 29A of the IBC bars wilful defaulters, promoters whose account has been classified NPA for over a year, any corporate debtor undergoing insolvency resolution, any person connected to any of the mentioned earlier, or the holding company, subsidiary company, associate company and related.
In case of borrowers who have committed frauds, malfeasance or have defaulted wilfully, the RBI has said that they will remain ineligible for restructuring. But existing promoters are replaced by new promoters, the Section 29A of the IBC will kick-in, and the lenders, without prejudice, will continue criminal action against the fraudulent promoters/management. According to Siby Antony of Edelweiss Asset, the new framework will lead to more companies going into liquidation if defaults are not resolved properly.
Moreover, if a borrower defaults with one lender, 100% of the lenders will have initiate steps to cure the default. Further, RBI has said that in respect of such large accounts, where an RP involving restructuring or change in the ownership is implemented within the 180-day period, the account should not be in default at any point of time during the ‘specified period’ that at least 20 percent of the outstanding principal debt is repaid.