RBI asset classification, income recognition and provisioning norms in case of Borrowers ongoing Insolvency Resolution Process (CIRP)

Asset classification, income recognition and provisioning norms in case of Borrowers ongoing Insolvency Resolution Process (CIRP)

RBI issues Master Circular on April 1, 2022 on prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts. The Circular also provides following provisions which are related to Insolvency and Bankruptcy Code, 2016

Provisions Norms in case of Borrower ongoing Insolvency Resolution Process (CIRP)

In respect of accounts of debtors where a final Resolution Plan, as approved by the Committee of Creditors, has been submitted by the Resolution Professional for approval of the Adjudicating Authority (in terms of section 30(6) of the IBC), lenders may keep the provisions held as on the date of such submission of Resolution Plan frozen for a period of six months from the date of submission of the plan or up to 90 days from the date of approval of the resolution plan by the Adjudicating Authority in terms of section 31(1) of the IBC, whichever is earlier.

The above facility of freezing the quantum of the provision shall be available only in cases where the provisioning held by the lenders as on the date of submission of the plan for approval of the Adjudicating Authority is more than the expected provisioning required to be held in the normal course upon implementation of the approved resolution plan, taking into account the contours of the resolution plan approved by Committee of Creditors/ Adjudicating Authority, as the case may be, and extant prudential norms. However, lenders shall not reverse the excess provisions held as on the date of submission of the resolution plan for approval of the Adjudicating Authority at this stage. In cases where the provisioning held is lower than the expected required provisioning, lenders shall make additional provisioning to the extent of the shortfall. Subsequent to the lapse of above mentioned period, provisioning shall be as per the norms laid out in Part A of the Master Circular.

The facility of freezing of provisions shall also lapse immediately if the Adjudicating Authority rejects the resolution plan thus submitted. Asset classification in respect of such borrower shall continue be governed by the extant asset classification norms.

Asset Classification of Interim Finance extended by the lenders to debtors undergoing insolvency proceedings under IBC

Any additional finance approved under the RP(including any resolution plan approved by the Adjudicating Authority under IBC) may be treated as ‘standard asset‘ during the monitoring period under the approved RP, provided the account demonstrates satisfactory performance (Satisfactory performance means that the borrower entity is not in default at any point of time during the period concerned) during the monitoring period. If the restructured asset fails to perform satisfactorily during the monitoring period or does not qualify for upgradation at the end of the monitoring period, the additional finance shall be placed in the same asset classification category as the restructured debt.

Similarly, any interim finance [as defined in section 5(15) of the IBC] extended by the lenders to debtors undergoing insolvency proceedings under IBC may be treated as ‘standard asset’ during the insolvency resolution process period as defined in the IBC. During this period, asset classification and provisioning for the interim finance shall be governed by the norms laid down in Part A of the Master Circular. Subsequently, upon approval of the resolution plan by the Adjudicating Authority, treatment of such interim finance shall be as per the norms applicable to additional finance, as above.

Change in Ownership: Asset Classification after transfer of ownership of a Corporate Debtor to Successful Resolution  Applicant(SPA) 

In case of change in ownership of the borrowing entities, credit facilities of the concerned borrowing entities may be continued/upgraded as ‘standard’ after the change in ownership is implemented, either under the IBC or under this framework. If the change in ownership is implemented under this framework, then the classification as ‘standard’ shall be subject to the following conditions:

a) Lenders shall conduct necessary due diligence in this regard and clearly establish that the acquirer is not a person disqualified in terms of Section 29A of the IBC. Additionally, the ‘new promoter’ should not be a person/entity/subsidiary/associate etc. (domestic as well as overseas), from the existing promoter/promoter group. Lenders should clearly establish that the acquirer does not belong to the existing promoter group (as defined in Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018).

b) The new promoter shall have acquired at least 26 per cent of the paid up equity capital as well as voting rights of the borrower entity and shall be the single largest shareholder of the borrower entity.

c) The new promoter shall be in ‘control’ of the borrower entity as per the definition of ‘control’ in the Companies Act, 2013 / regulations issued by the Securities and Exchange Board of India/any other applicable regulations / accounting standards as the case may be.

d) The conditions for implementation of RP as laid out in Part B1 of the Master Circular are complied with.

Upon change in ownership, all the outstanding loans/credit facilities of the borrowing entity need to demonstrate satisfactory performance during the monitoring period. If the account fails to perform satisfactorily at any point of time during the monitoring period, it shall trigger a fresh Review Period(see later part).

The quantum of provisions held (excluding additional provisions) by the bank against the said account as on the date of change in ownership of the borrowing entities can be reversed only after the end of monitoring period subject to satisfactory performance during the same.

When can a Bank initiate insolvency proceedings against a Borrower?

The Master Circular provides that all lenders must put in place Board-approved policies for resolution of stressed assets, including the timelines for resolution. Since default with any lender is a lagging indicator of financial stress faced by the borrower, it is expected that the lenders initiate the process of implementing a resolution plan even before a default. In any case, once a borrower is reported to be in default by any of the lenders, lenders shall undertake a prima facie review of the borrower account within thirty days from such default (“Review Period”). During this Review Period of thirty days, lenders may decide on the resolution strategy, including the nature of the resolution plan, the approach for implementation of the resolution plan, etc. The lenders may also choose to initiate legal proceedings for insolvency or recovery.

Click here to access RBI Master Circular.

 


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