RBI'S

RESOLUTION FRAMEWORK 2.0

Resolution of Covid-19 stress  of Individuals and Small Businesses / MSMEs



 

Resolution of Covid-19 related stress  of Individuals and Small Businesses

 

Introduction  

  • Individual and small businesses        
  • Eligibility         
  • Exclusions     
  • Initiation  / Invocation of resolution process  
  • Role of Lending Institution : Approved policy by lender within 4 weeks       
  • Contents of policy      
  • Policy to be publicised/ put on the website   
  • When invoked
  • Decision within 30 days
  • Each lending institution to take decision indipendent of other lenders
  • Last date
  • Permitted features of resolution plans and implementation   
  • Moratorium Period
  • Implementation within 90 days
  • Asset classification and provisioning : Accounts to be treated as Standard
  • Sanction additional finance even before implementation of the plan
  • Convergence of the norms for loans resolved previously through the Resolution Framework – 1.0          
  • Working capital support for small businesses where resolution plans were implemented previously         
  • Disclosures and Credit Reporting     

MSME’s         

  • Resolution Framework 2.0 – Resolution of Covid-19 related stress of Micro, Small and Medium Enterprises (MSMEs)        
  • Invocation and Implementation          
  • Asset classification and provisioning

Subros and Associates      

 


 

Introduction

Vide its circular dated August 6, 2020 on “Resolution Framework for COVID-19-related Stress” (“Resolution Framework – 1.0”) the Reserve Bank of India (hereinafter called “RBI”)  had provided a window to enable lenders to implement a resolution plan in respect of eligible corporate exposures without change in ownership, and personal loans, while classifying such exposures as Standard, subject to specified conditions. The same was issued under the RBI (Prudential Framework for Resolution of Stressed Assets) Directions, 2019, dated June 7, 2019 (called “Framework”) to implement resolution plans in respect of eligible borrowers without change in ownership, as well as personal loans, while classifying such exposures as ‘standard’ subject to the conditions prescribed therein.

Under the circular, dated August 6, 2020, on ‘Micro, Small and Medium Enterprises (“MSME”) sector – Restructuring of Advances’ existing loans to MSMEs, classified as 'standard', were permitted to be restructured without a downgrade in the asset classification

However with the resurgence of Covid-19 pandemic in India and the consequent containment measures implimented may impact the recovery process and create new uncertainties, RBI has issued two circulars, dated May 5, 2021,

I. ‘Resolution Framework – 2.0: Resolution of COVID-19 related stress of Individuals and Small Businesses’ permitting Lenders to offer a limited window to individual borrowers and small businesses to implement resolution plans in respect of their credit exposures while classifying the credit exposures as ‘standard’ upon implementation of the resolution plan (“Resolution Framework 2.0”)

II. ‘Resolution Framework – 2.0: Resolution of COVID-19 related stress of MSMEs’ further extending the benefit conferred by Resolution Framework 1.0-MSME (“Resolution Framework 2.0-MSME”).

The objective is of alleviating the potential stress to individual borrowers and small businesses, the following set of measures are being announced. These set of measures are broadly in line with the contours of the Resolution Framework - 1.0, with suitable modifications.

 

Individual and small businesses

Resolution Framework 2.0 permits the Lenders to offer a limited window to individual borrowers and small businesses to implement resolution plans in respect of their credit exposures while classifying the same as Standard upon implementation of the resolution plan subject to the conditions specified hereafter.

 

Eligibility

The following borrowers shall be eligible for the window of resolution to be invoked by the lending institutions:

a. Individuals who have availed of personal loans , excluding the credit facilities provided by lending institutions to their own personnel/staff.

b. Individuals who have availed of loans and advances for business purposes and to whom the lending institutions have aggregate exposure of not more than Rs.25 crore (Rupees Twenty Five Crores)  as on March 31, 2021.

c. Small businesses, including those engaged in retail and wholesale trade, other than those classified as micro, small and medium enterprises as on March 31, 2021, and to whom the lending institutions have aggregate exposure of not more than Rs.25 crore (Rupees Twenty Five Crores)  as on March 31, 2021.

 

Exclusions

(a) Borrower accounts / credit facilities shall not belong to the categories listed in sub-clauses (a) to (e) of the Clause 2 of the Annex to the Resolution Framework 1.0, read with the response to Sl. No. 2 of FAQs on Resolution Framework for Covid-19 related stress (Revised on December 12, 2020) as under;

i. MSME borrowers whose aggregate exposure to lending institutions collectively, is ₹25 crore or less as on March 1, 2020.

ii. Farm credit as listed in Paragraph 6.1 of Master Direction FIDD.CO.Plan.1/04.09.01/2016-17 dated July 7, 2016 (as updated) or other relevant instructions as applicable to specific category of lending institutions issued by RBI on priority sector lending, except for the following loans:

                     loans to allied activities, viz., dairy, fishery, animal husbandry, poultry, bee- keeping and sericulture;

                     loans given to farmer households if they do not meet any other conditions for exclusions listed in Resolution Framework 1.0;

iii. Loans to Primary Agricultural Credit Societies (PACS), Farmers' Service Societies (FSS) and Large-sized Adivasi Multi-Purpose Societies (LAMPS) for on-lending to agriculture.

iv. Exposures of lending institutions to financial service providers.

v. Exposures of lending institutions to Central and State Governments; Local Government bodies (eg. Municipal Corporations); and, body corporates established by an Act of Parliament or State Legislature.

(a)           The borrower accounts should not have availed any resolution in terms of the Resolution Framework 1.0, subject to the exemption that,  where resolution plans had been implemented in terms of the Resolution Framework – 1.0, and where the resolution plans had permitted no moratoria or moratoria of less than two years and / or extension of residual tenor by a period of less than two years, lending institutions are permitted to use this window to modify such plans only to the extent of increasing the period of moratorium / extension of residual tenor subject to the caps in Clause 12 above, and the consequent changes necessary in the terms of the loan for implementing such extension. The overall caps on moratorium and / or extension of residual tenor granted under Resolution Framework – 1.0 and this framework combined, shall be two years.

 

(b)          Provided further that the credit facilities / investment exposure to the borrower was classified as Standard by the lending institution as on March 31, 2021.

 

Initiation  / Invocation of resolution process

Role of Lending Institution : Approved policy by lender within 4 weeks

The bank  / lending institutions shall frame Board approved policies (not later than four weeks from may 05, 2021 ), pertaining to implementation of viable resolution plans for eligible borrowers under this framework. The bank  / lending institutions policy to ensure that the resolution under this facility is provided only to the borrowers having stress on account of Covid-19.

 

Contents of policy

The Board approved policy shall, detail the eligibility of borrowers in respect of whom the lending institutions shall be willing to consider the resolution, and shall lay down the due diligence considerations to be followed by the lending institutions to establish the necessity of implementing a resolution plan in respect of the concerned borrower as well as the system for redressing the grievance of borrowers who request for resolution under the window and / or are undergoing resolution under this window.

 

Policy to be publicised/ put on the website

The Board approved policy shall be sufficiently publicised and should be available on the website of the lending institutions in an easily accessible manner.

When invoked

The resolution process shall be treated as invoked when the lending institution and the borrower agree to proceed with the efforts towards finalising a resolution plan to be implemented in respect of such borrower.

 

Decision within 30 days

In respect of applications received by the lending institutions from their customers for invoking resolution process under this window, the assessment of eligibility for resolution as per the instructions contained in this circular and the Board approved policy put in place as above shall be completed, and the decision on the application shall be communicated in writing to the applicant by the lending institutions within 30 days of receipt of such applications. In order to optimise the processing time, lending institutions may prepare product-level standardized templates as part of their Board approved policies, as above, for resolution under this window.

 

Each lending institution to take decision indipendent of other lenders

The decision to invoke the resolution process under this window shall be taken by each lending institution having exposure to a borrower independent of invocation decisions taken by other lending institutions, if any, having exposure to the same borrower.

 

Last date

The last date for invocation of resolution permitted under this window is September 30, 2021.

 

Permitted features of resolution plans and implementation

The resolution plans implemented under this window may inter alia include

- rescheduling of payments

- conversion of any interest accrued or to be accrued into another credit facility

-  revisions in working capital sanctions,

- granting of moratorium etc.

based on an assessment of income streams of the borrower.

Compromise settlements are not permitted as a resolution plan for this purpose.

 

Moratorium Period

The moratorium period, if any, granted under the resolution plan, shall be for a maximum period of 2 (two) years, starting immediately upon the implementation of the resolution plan. The borrowers may also be granted an extension of the residual tenor of loan facilities, with or without a payment moratorium, subject to an overall cap of 2 (two) years (including the moratorium period, if any).

Resolution plan may also provide for conversion of a portion of the debt into equity or other marketable, non-convertible debt securities issued by the borrower, wherever applicable, and the same shall be governed in terms of the Resolution Framework – 1.0.,

 

Implementation within 90 days

The resolution plan should be finalised and implemented within 90 days from the date of invocation of the resolution process under this window.

 The resolution plan shall be deemed to be implemented only if all of the following conditions are met (a) all related documentation, including execution of necessary agreements between lending institutions and borrower and collaterals provided, if any, are completed by the lenders concerned in consonance with the resolution plan being implemented; (b) the changes in the terms of conditions of the loans get duly reflected in the books of the lending institutions; and, (c) borrower is not in default with the lending institution as per the revised terms.

 

Any resolution plan implemented in breach of the stipulations of this circular shall be fully governed by the Prudential Framework for Resolution of Stressed Assets issued on June 7, 2019 (“Prudential Framework”), or the relevant instructions as applicable to specific category of lending institutions where the Prudential Framework is not applicable.

 

Asset classification and provisioning : Accounts to be treated as Standard

If a resolution plan is implemented in adherence to the provisions Resolution Framework 2.0, the asset classification of borrowers’ accounts classified as Standard may be retained as such upon implementation, whereas the borrowers’ accounts which may have slipped into NPA between invocation and implementation may be upgraded as Standard, as on the date of implementation of the resolution plan.

 The subsequent asset classification for such exposures will be governed by the criteria laid out in the Master Circular - Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated July 1, 2015 or other relevant instructions as applicable to specific category of lending institutions (“extant IRAC norms”).

Sanction additional finance even before implementation of the plan

In respect of borrowers where the resolution process has been invoked, lending institutions are permitted to sanction additional finance even before implementation of the plan in order to meet the interim liquidity requirements of the borrower. This facility of additional finance may be classified as ‘Standard’ till implementation of the plan regardless of the actual performance of the borrower in the interim. However, if the resolution plan is not implemented within the stipulated timelines, the asset classification of the additional finance sanctioned will be as per the actual performance of the borrower with respect to such additional finance or performance of the rest of the credit facilities, whichever is worse.

 The lending institutions shall keep provisions from the date of implementation, which are higher of the provisions held as per the extant IRAC norms immediately before implementation, or 10% (10 percent) of the renegotiated debt exposure of the lending institution post implementation (residual debt). Residual debt, for this purpose, will also include the portion of non-fund based facilities that may have devolved into fund based facilities after the date of implementation.

Half of the above provisions may be written back upon the borrower paying at least 20% (20 per cent) of the residual debt without slipping into NPA post implementation of the plan, and the remaining half may be written back upon the borrower paying another (10%) 10 per cent of the residual debt without slipping into NPA subsequently.

Provided that in respect of exposures other than personal loans, the above provisions shall not be written back before one year from the commencement of the first payment of interest or principal (whichever is later) on the credit facility with longest period of moratorium.

The provisions required to be maintained under The Resolution Framework 2.0 , to the extent not already reversed, shall be available for the provisioning requirements when any of the accounts, where a resolution plan had been implemented, is subsequently classified as NPA.

The credit facilities for which, the resolution plans implemented under Resolution Framework 1.0 have been modified pursuant to the window provided for under Resolution Framework 2.0, the instructions regarding asset classification and provisioning shall continue to be as provided for under Resolution Framework 1.0.

 

Convergence of the norms for loans resolved previously through the Resolution Framework – 1.0

In relation to:

(a)           individuals who have availed loans and advances for business purposes and to whom the Lenders have an aggregate exposure of not more than Rs. 25,00,00,000 (Rupees twenty five crore) as on March 31, 2021; and

(b)          small businesses, including those engaged in retail and wholesale trade, other than those classified as MSME as on March 31, 2021, and to whom the Lenders have aggregate exposure of not more than Rs. 25,00,00,000 (Rupees twenty five crore) as on March 31, 2021,

where resolution plans had been implemented in terms of the Resolution Framework – 1.0, and where the resolution plans had permitted no moratoria or moratoria of less than two years and / or extension of residual tenor by a period of less than two years, lending institutions are permitted to use this window to modify such plans only to the extent of increasing the period of moratorium / extension of residual tenor subject to the caps in Clause 12 of the guidelines , and the consequent changes necessary in the terms of the loan for implementing such extension. The overall caps on moratorium and / or extension of residual tenor granted under Resolution Framework – 1.0 and this framework combined, shall be two years.

 

Working capital support for small businesses where resolution plans were implemented previously

In respect of

a. individuals who have availed loans and advances for business purposes and to whom the Lenders have an aggregate exposure of not more than Rs. 25,00,00,000 (Rupees twenty five crore) as on March 31, 2021; and

b. small businesses, including those engaged in retail and wholesale trade, other than those classified as MSME as on March 31, 2021, and to whom the Lenders have aggregate exposure of not more than Rs. 25,00,00,000 (Rupees twenty five crore) as on March 31, 2021,

 where resolution plans had been implemented in terms of the Resolution Framework – 1.0, lending institutions are permitted, as a one-time measure, to review the working capital sanctioned limits and / or drawing power based on a reassessment of the working capital cycle, reduction of margins, etc. without the same being treated as restructuring.

The decision with regard to above shall be taken by lending institutions by September 30, 2021, with the margins and working capital limits being restored to the levels as per the resolution plan implemented under Resolution Framework – 1.0, by March 31, 2022.

The above measures shall be contingent on the lending institutions satisfying themselves that the same is necessitated on account of the economic fallout from COVID-19.

Further, accounts provided relief under these instructions shall be subject to subsequent supervisory review with regard to their justifiability on account of the economic fallout from COVID-19.

Lending institutions are required to put in place a Board approved policy to implement the above measures, which should be disclosed in the public domain and placed on their websites in a prominent and easily accessible manner.

 

Disclosures and Credit Reporting

The Lenders are required to make necessary disclosures in their quarterly/ half-yearly/ annual financial statements, as applicable, as per the prescribed formats, in respect of the accounts where resolution plans were implemented.

The Lenders shall also be required to disclose the number of borrower accounts where the resolution plans implemented under Resolution Framework 1.0 were modified pursuant to the window provided for, under Resolution Framework 2.0, on a quarterly basis, starting from the quarter ending June 30, 2021.

The credit reporting by the lending institutions in respect of borrowers where the resolution plan is implemented under Part A of this window shall reflect the “restructured due to COVID-19” status  (circular : DoR.FIN.REC.46/20.16.056/2020-21 dated March 12, 2021) of the account. The credit history of the borrowers shall consequently be governed by the respective policies of the credit information companies as applicable to accounts that are restructured.


 

MSME’s

Resolution Framework 2.0 – Resolution of Covid-19 related stress of Micro, Small and Medium Enterprises (MSMEs)

Resolution Framework 2.0-MSME extends the benefits conferred by Resolution Framework 1.0- MSME, and further permits restructuring of the existing loans availed by MSMEs without a downgrade in the asset classification, subject to the conditions mentioned .

 

In addition to the conditions mentioned herein, all other conditions/ instructions specified in Resolution Framework 1.0-MSME (dated august 6, 2020)  shall remain applicable to the restructuring of existing loans under Resolution Framework 2.0-MSME.

 

 

 

Eligibility

(i) The borrower should be classified as a micro, small or medium enterprise as on March 31, 2021 .

(ii) The borrowing entity is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration. This shall be determined on the basis of exemption limit obtaining as on March 31, 2021.

(iii) The aggregate exposure, including non-fund based facilities, of all lending institutions to the borrower does not exceed ₹25 crore as on March 31, 2021.

(iv) The borrower’s account was a ‘standard asset’ as on March 31, 2021.

(v) The borrower’s account was not restructured in terms of the circulars dated August 6, 2020; February 11, 2020;  or January 1, 2019 (collectively referred to as MSME restructuring circulars).

 

Invocation and Implementation

Resolution Framework 2.0-MSME directs the Lenders to frame Board approved policies within 1 (one) month from the date of Resolution Framework 2.0-MSME (May 5, 2021) on restructuring of MSME advances.

The decisions on applications received by the lending institutions from their customers for invoking restructuring under this facility shall be communicated in writing to the applicant by the lending institutions within 30 days of receipt of such applications.

The decision to invoke the restructuring under this facility shall be taken by each lending institution having exposure to a borrower independent of invocation decisions taken by other lending institutions, if any, having exposure to the same borrower.

The restructuring under the Resolution Framework - 2.0 shall be treated as invoked when the lending institution and the borrower agree to proceed with the efforts towards finalising a restructuring plan to be implemented in respect of such borrower.

The restructuring of the borrower account is to be invoked by September 30, 2021.

The restructuring of the borrower account is to be implemented within 90 days from the date of invocation.

All other instructions specified in the circular dated August 6, 2020 shall remain applicable.

 

Asset classification and provisioning

In respect of restructuring plans so implemented, asset classification of borrowers classified as standard may be retained as such, whereas the accounts which may have slipped into NPA category between April 1, 2021 and date of implementation may be upgraded as ‘standard asset’, as on the date of implementation of the restructuring plan.

In respect of accounts of borrowers which were restructured in terms of the MSME restructuring circulars, lending institutions are permitted, as a one-time measure, to review the working capital sanctioned limits and / or drawing power based on a reassessment of the working capital cycle, reduction of margins, etc. without the same being treated as restructuring.

The decision with regard to above shall be taken by lending institutions by September 30, 2021.

The reassessed sanctioned limit / drawing power shall be subject to review by the lending institution at least on a half yearly basis and the renewal / reassessment at least on an annual basis. The annual renewal/reassessment shall be expected to suitably modulate the limits as per the then-prevailing business conditions.

The above measures shall be contingent on the lending institutions satisfying themselves that the same is necessitated on account of the economic fallout from Covid-19. Further, accounts provided relief under these instructions shall be subject to subsequent supervisory review with regard to their justifiability on account of the economic fallout from Covid-19.

 

 

Download
RESOLUTION FRAMEWORK – 2.0 Resolution of Covid-19 stress of Individuals and Small Businesses
Vide its circular dated August 6, 2020 on “Resolution Framework for COVID-19-related Stress” (“Resolution Framework – 1.0”) the Reserve Bank of India had provided a window to enable lenders to implement a resolution plan in respect of eligible corporate exposures without change in ownership, and personal loans, while classifying such exposures as Standard.

However with the resurgence of Covid-19 pandemic in India and the consequent containment measures implemented may impact the recovery process and create new uncertainties, RBI has issued two circulars, dated May 5, 2021.

This newsletter presents a detailed analysis of rights and duties of various stake holders.
Legal Connect 2021 Vol 01.pdf
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