The Reserve Bank of India (RBI), on 26th February, issued guidelines for revitalizing distressed assets by forming Joint Lenders’ Forum (JLF) and adoption of Corrective Action Plan (CAP) for operationalising the framework.
“The general principle of restructuring should be that the shareholders bear the first loss rather than the debt holders,” the RBI said. With this in view and also to ensure more ‘skin in the game’ of promoters, the RBI suggested JLF/CDR to consider several options, including the possibility of transferring equity of the company by the promoters to the lenders “to compensate for their sacrifices” when a loan is restructured.
The RBI suggested infusion of more equity into their companies by promoters and transfer of their holdings to a security trustee or an escrow arrangement till the turnaround of the company. “This will enable a change in management control, should lenders favour it,” it said.
In case a borrower had undertaken diversification or expansion of activities, resulting in the stress on the core-business of the group, a clause for sale of non-core assets or other assets could be stipulated as a condition for restructuring the account, it said.
Banks would be required to report credit information, including classification of an account to Central Repository of Information on Large Credits (CRILC), on all their borrowers having aggregate fund and non-fund based exposure of Rs.5 crore and above with them.
As soon as an account was reported by any of the lenders to CRILC, where principal or interest payment overdue between 61 days and 90 days, they should mandatorily form a committee to be called JLF if the aggregate exposure (AE) of lenders in that account was over Rs.100 crore, the RBI said.
Lenders also had the option to form a JLF even when the AE in an account was less than Rs.100 crore, it noted. All the lenders should formulate and sign an agreement incorporating the broad rules for the functioning of the JLF.
The Indian Banks’ Association (IBA) would prepare a master JLF agreement and operational guidelines for JLF which could be adopted by all lenders. The RBI said that the JLF should invite representatives of the Central/State government/project authorities/local authorities if they had a role in the implementation of the project financed.
While JLF formation and subsequent corrective actions would be mandatory in accounts having AE of Rs.100 crore and above, in other cases also the lenders would have to monitor the asset quality closely and take corrective action for effective resolution as deemed appropriate.
For accounts with AE of less than Rs.500 crore, the restructuring package should be approved by the JLF and conveyed by the lenders to the borrower within the next 15 days for implementation.
The RBI further said that for accounts with AE of Rs.500 crore and above, the techno-economic viability study and restructuring package would have to be subjected to an evaluation by an independent evaluation committee (IEC) of experts. “The IEC will look into the viability aspects after ensuring that the terms of restructuring are fair to the lenders.”
The IEC would be required to give its recommendation in these cases to the JLF within 30 days. Thereafter, considering the views of IEC, if the JLF decided to go ahead with the restructuring, the restructuring package, including all terms and conditions as mutually agreed upon between the lenders and the borrower, would have to be approved by all the lenders and communicated to the borrower within next 15 days for implementation.
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