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Published on 10/06/2019 10:20:24 AM | Source: Motilal Oswal Securities Ltd

RBI issues revised stressed asset resolution framework - Motilal Oswal

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RBI issues revised stressed asset resolution framework

Allows more flexibility to lenders; mandates higher provisions on delayed implementation

The RBI has released a revised stressed asset resolution framework for early recognition and resolution of stressed assets after Supreme Court (SC) quashed its Feb 12th circular earlier this year in April. The revised framework is immediately applicable for resolution of loan accounts of >INR20b while for loan accounts of INR15b-20b, the revised norms will be applicable from 1st Jan 2020.

Under the revised framework the lenders – (a) will be allowed a “30 day” review period from the date of default and will thereafter have 180 days to implement the resolution plan, (b) lenders can choose to initiate legal proceedings for insolvency or agree on other resolutions plans vs earlier requirement of mandatorily referring the stressed asset to IBC if the resolution plan is not implemented within 180 days, (c) lenders approval requirement for arriving at a resolution plan has been lowered to 75% by value and 60% by number vs earlier requirement of 100% creditors approval; (d) proposal to make incremental provisioning at 20% if resolution plan is not implemented within 180 days / 35% if implementation is delayed beyond 365 days from commencement of review period, and, (e) provides incentives to take the IBC route by allowing write-back on additional provisions made on the stressed accounts.

We believe the revised framework will fast-track the resolution of residual stressed assets in the system and requirement of additional provisions on any implementation delays will act as a strong incentive for lenders to complete resolution within the prescribed timelines. The revised framework will though increase the number of cases that will get referred to NCLT as it allows lenders to write-back the additional provisions. The gross stressed assets of large corporate banks have declined significantly while provisioning coverage has seen robust improvement. We thus expect limited impact on asset quality as banks follows the revised resolution framework. We continue to like SBIN, ICICIBC and AXSB.

 

* Revised framework allows a “30 day” review period; to be applicable for assets >INR15b:

The revised resolution framework provides lenders a “30 day” review period from the date of default and thereafter another 180 days to implement a resolution plan vs earlier framework in which the lenders must start action as soon as there is an overdue in the borrowers account with any lender. The framework is applicable to loan accounts >INR20b however from 1st Jan 2020, these rules will also be applicable to accounts between INR15-20b.

 

* Allows flexibility to lenders to implement a resolution plan; Inter-Creditor agreement (ICA) norms have been eased:

Under the revised framework, the lenders have complete discretion to choose a resolution plan and can decide to initiate insolvency proceedings under IBC route without any requirement to follow a prescribed timeline. Also, the earlier prevalent stressed asset resolution schemes like CDR, flexible structuring of long-term project loans, SDR and S4A stand withdrawn with immediate effect. RBI has also eased the inter-creditor agreement (ICA) norm for implementing a resolution plan and requires approval of 75% of lenders by value (fund + non-fund) and 60% by number vs earlier requirement of 100% approval from the creditors.

 

* Accelerated provisioning will incentivize early implementation of resolution plan:

RBI has mandated the additional provisions of 20% if the lenders fail to implement a resolution plan within 180 days from the end of review period, 35% if the delay exceeds beyond 365 days from the commencement of review period. This implies that banks have to accelerate provisions to 35% (15% regulatory requirement+ 20% accelerated provisions) within 180 days from the end of the review period and 50% within one year from the date of default. This will incentivize banks to promptly pursue a resolution plan and drive accelerated cleansing of bad loans.

 

* Incentivize lenders to take IBC route & benefit from provisioning write-backs:

According to the new framework, the lenders can write-backs additional provisions if the account is referred for resolution under IBC route –

* 50% of additional provisions will be reversed on filing of the insolvency application

* Balance additional provisions will be reversed upon admission of the borrower into the insolvency resolution process under IBC

 

* Resolution plan (RP) to be rated externally: The resolution plan for all large stressed accounts (>INR1b) should have Independent Credit Evaluation (ICE) done by Credit Rating Agencies (CRA) in order to boost transparency and improve the quality of resolution. Accounts of INR5b+ will require ICE from at least two CRAs. Any ICE should have a rating of RP4 or above in order to be considered for implementation.

 

* Conditions of Upgrade of stressed account: The RBI has slightly relaxed the rules for upgradation of stressed account to standard category. The account can only be upgraded if all the outstanding loans/ facilities demonstrate satisfactory performance from the date of implementation of the resolution plan upto the date by which at least 10% of the sum of the outstanding loan and the interest is repaid vs earlier requirement of 20%.

 

* Valuation view:

We believe the revised framework will fast-track the resolution of residual stressed assets in the system and requirement of additional provisions on any implementation delays will act as a strong incentive for lenders to complete resolution within the prescribed timelines. The revised framework will though increase the number of cases that will get referred to NCLT as it allows lenders to write-back the additional provisions. The gross stressed assets of large corporate banks have declined significantly while provisioning coverage has seen robust improvement. We thus expect limited impact on asset quality as banks follows the revised resolution framework. We continue to like SBIN, ICICIBC and AXSB.

 

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