1) Sick Industrial Companies (Special Provisions) Act (SICA) 1985:

In 1985 based on the recommendations of the Tiwari Committee, The Government of India enacted The Sick Industrial Companies (Special Provisions) Act; 1985. The act was enacted for the timely detection of sick / potentially sick companies owning industrial undertakings and to empower a Board for prescribing measures either for revival of potentially viable units or closure/liquidation of nonviable companies. 

Under the SICA Act, two quasi-judicial bodies were set up:

a) Board for Industrial and Financial Reconstruction (BIFR) – BIFR was set up to tackle industrial sickness and had powers for taking appropriate measures for revival and rehabilitation of potentially sick undertakings and for liquidation of non-viable companies.

b) Appellate Authority for Industrial and Financial Reconstruction (AAIFR) –  AAIFR was constituted to hear appeals against the orders of the BIFR.

The BIFR and the AAIFR took significant time in dealing with cases. Further revival under SICA was lengthy and often plagued with uncertainties. The SICA 1985 was repealed in 2003 through enactment of Sick Industrial Companies (Special Provisions) Repeal Act,2003 and the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) were constituted under Companies Act, 2013. The NCLT has a wider jurisdiction and has power to hear various matters related to companies incorporated in India including matters related to mergers, amalgamations, revival or rehabilitation of companies.

2) Health Code System of classification advances by RBI

RBI in November 1985 introduced a Heath Code System to critically analyse and monitor credit/advances comprehensively. The purpose was to have uniformity among banks for analyzing and monitoring credit quality of various loans and advances. Under the Health Code System, the quality (or health) of advances were classified under the following eight categories:

Under the Health Code System, RBI classified problem loans of each bank into three categories:
i) Advances classified as ‘bad and doubtful’, which corresponded to Health Code No. 8.
ii) Advances where suits were filed and/or decrees obtained, corresponding to health codes No. 6 and 7 and
iii) Those advances with ‘undesirable features’, which broadly corresponded to Health Code No. 4 and 5.

However, The Narasimham Committee in 1991 felt that the classification of assets according to the health codes was not in accordance with international standards. The Committee wanted to make the classification of assets and income recognition norms for banks based on the record of recovery and more objective as compared to various subjective considerations. As per international practice at that time, an asset was treated as non-performing when it was due for at least two quarters.

The Narasimham Committee in 1991 also suggested that for the purpose of provisioning, banks and financial institutions should classify their assets into four broad groups:

(i) Standard

(ii) Sub-standard,

(iii) Doubtful and

(iv) Loss.

Hence, RBI based on these recommendations of Narasimhan Committee, compressed these Health codes and made the classification of advances more objective based on record of recovery of account and introduced various regulations to this effect.

1) M Narasimham Committee Report (1991)

A Committee on the Financial System under the chairmanship of M Narasimham was tasked to suggest reforms in the Financial and Banking Sector. The M Narasimham Committee Report (1991) laid the foundation stone for various regulatory provisions of Reserve Bank of India related to Banking sector which are applicable even today.

Some of the Recommendations included:

1) Lowering Statutory Liquidity Ratio and Cash Reserve Ratio

2) Introducing Prudential Norms for Income Recognition and Asset Classification in order bring about objectivity and uniformity in Income recognition and asset classifications and provisioning of advances

3) Capital Adequacy Norms

4) Interest rate deregulation

5) Setting up of special tribunals for recovery of debts due to bank and financial institutions

6) Opening up of the banking sector for private sector players

7) Permit access to capital from capital markets/IPOs.

1) RBI Guidelines – Prudential Norms on Income Recognition and Asset Classification – 1993

In line with the international practices and as per the recommendations by M. Narasimham Committee, the Reserve Bank of India introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances of banks in order to move towards greater consistency and transparency in the published accounts.

Accordingly, Non-performing assets were defined as under in 1993:

An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A ‘non-performing asset’ (NPA) was defined as a credit facility in respect of which the interest and/ or installment of principal has remained ‘past due’ for a specified period of time. The specified period was reduced in a phased manner as under:

Further, An amount due under any credit facility is treated as “past due” when it was not been paid within 30 days from the due date. Hence this gave additional 30 days over and above the period as mentioned in the above table.

RBI through these regulations also required banks to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:

a) Sub-standard Assets – Account which was classified as NPA for a period not exceeding two years

b) Doubtful Assets – Account which remained NPA for a period exceeding two years

c) Loss Assets – where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly

Restructuring/ Rescheduling of Loans:

A standard asset where the terms of the loan agreement regarding interest and principal that were renegotiated or rescheduled after commencement of production were classified as sub-standard and the RBI regulations required that such loans should remain in same category for at least one year of satisfactory performance under the renegotiated or rescheduled terms.

Further, in the case of sub-standard and doubtful assets also, rescheduling did not entitle a bank to upgrade the classification of advance automatically unless there was satisfactory performance under the rescheduled / renegotiated terms.

The norms relating to restructuring of standard and sub-standard assets were reviewed in March 2001. (Discussed in detail in 2001 tab)

2) The Recovery Of Debts Due To Banks And Financial Institution Act, 1993 

The Government of India in 1981 constituted a committee headed by Mr T. Tiwari, this committee suggested setting up a quasi-judicial body exclusively for banks and financial institutions in order quickly dispose-off the recovery cases filed by the banks and financial institutions against the borrowers. In 1991 M Narsimham Committee also endorsed this view. Pursuant to these recommendations Government of India enacted The Recovery Of Debts Due To Banks And Financial Institution Act, 1993. 

Quasi-judicial authorities constituted were as under:

a) Debt Recovery Tribunal (DRT)  – had the power and authority to decide application from banks and financial institutions to recover a debt due to such banks and financial institutions if the balance outstanding to the bank or financial institution is Rs.10.00 lakh and above.

b) Debt Recovery Appellate Tribunal (DRAT) – was constituted to hear appeals against the orders of the DRT. In case of appeal against the order of DRT, the debtor is required to deposit 50% of the amount that he is required to pay as per the order of the DRT. However, this amount can be reduced to 25% by DRAT.

DRAT order can be challenged before the High Court or Supreme Court.

1) Dissemination of information regarding defaulters of Rs.1 crore and above

In order to alert the banks and financial institutions (FIs) and put them on guard against borrowers that  defaulted to other lending institutions, RBI issued a circular DBOD No.BC/CIS/47/20.16.002/94 dated April 23, 1994. Through the circular RBI announced an arrangements for circulating among banks and FIs names of defaulting borrowers above 1 Crore.

The features of the scheme were modified from time to time, however at present following is applicable: 

In case of Suit Filed Cases a list has to be published by banks and FIs. This list is available https://suit.cibil.com/

In case of Non-Suit Filed Cases, Banks and FIs are required to submit to RBI twice a year (on March 31 and September 30) the details of the non-suit filed accounts/advances which have been classified as doubtful and loss accounts by them for outstanding (funded and non-funded) exposure aggregating to Rs.1 crore and above. The data on defaulters so received from banks/FIs is circulated in a consolidated form by RBI to all the banks and FIs.

1) Compromise Settlement/Negotiated Settlement Schemes:

The broad framework for compromise or negotiated settlement of NPAs was advised by RBI in July 1995 vide circular DBOD.No.BP.BC.81/21.01.040/95 dated July 28, 1995.  As per the circular Banks had been given freedom to frame their own policy on writing-off of bad debts and compromise settlements, with the approval of Board of Directors. 

RBI also issued fresh guidelines for providing simplified, non discretionary and non discriminatory mechanism for compromise settlement for small borrowers for arriving at settlement of NPA below the prescribed value. RBI issued circular DBOD. BP. BC.11/21.01.040/99-00 dated 27th July 2000, setting out the guidelines for compromise settlements of chronic NPAs up to Rs.5.00 crore in Public Sector Banks. In 2003 RBI, in consultation with the government, decided to extend the scheme for bad loans up to Rs 10 crores.

RBI in May 2001 also issued Guidelines for Compromise Settlement of Dues of Banks and Financial Institutions through Lok Adalats. Ceiling of amount for coverage under Lok Adalats was restricted for cases involving an amount upto Rs. 5 lakhs.

Lok Adalats are formed under Legal Service Authority Act, 1987 and provided means for recovery to banks. The Lok Adalats are conducted by the State Legal Service Authorities for ensuring speedy settlement. Debt Recovery tribunals have also now been empowered to organize Lok Adalats to decide on case of NPAs of Rs. 10 lakhs and above.

1) Scheme on collection and dissemination of information on cases of willful defaults of Rs.25 lakh and above – 1999

Pursuant to the instructions of the Central Vigilance Commission, RBI introduced the above scheme vide circular DBOD No.BC.DL (W)12/20.16.002(1)/98-99 dated February 20, 1999. Under the scheme RBI collects and disseminates information on cases of willful defaults of Rs.25 lakhs and above on a quarterly basis.

As per this regulation a borrower was declared a Willful defaulter in case of following:
a) Deliberate non-payment of the dues despite adequate cash flow and good networth.
b) Siphoning off of funds to the detriment of the defaulting unit.
c) Assets financed have either not been purchased or have been sold and proceeds have been mis-utilized.
d) Misrepresentation/falsification of records.
e) Disposal/removal of securities without bank’s knowledge.
f) Fraudulent transactions by the borrower.

The names of directors that were stakeholders were also reported and the names of Professional Directors and Nominee Directors of FIs, Central/State Governments were not be reported.

The circular has undergone several changes in 2002 vide circular DBOD No.DL(W)BC.110/ 20.16.003/2001-02 dated May 30, 2002, RBI redefined the the term ‘wilful default’ and certain major provisions applicable currently on Willful defaults is given in following paragraphs

2) Master Circular on Willful Defaulters – 2015

Willful Defaulter Definition:

As per the revised guidelines Willful Default would be deemed to have occurred if any of the following events is noted when the borrower/Company has defaulted (intentionally/deliberately) in meeting its payment / repayment obligations to the lender:

a) when it has the capacity to honour the said obligations.
b) the borrower has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
c) the borrower has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
d) the borrower has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank / lender.

Measures to be initiated by the banks and FIs against the willful defaulters:

a) No additional facilities should be granted

b) legal proceedings/criminal proceedings against willful defaulters

c) change of management

d) Initiation of action for reporting names as willful defaulter of the borrowing company, its promoter and whole-time director.

e) Person that has been declared willfull defaulter cannot be inducted on board of any Company where Lender is providing facility or steps need to taken for removal of such person from board

f) Where guarantees are given, the group companies should also be reckoned as willful defaulters

g) Credit Information Companies will disseminate information on non-suit filed and suit filed accounts of Willful Defaulters, as reported to them by the banks / FIs to other banks/FIs. Where suits have been filed by banks and FIs, the list can be accessed at https://suit.cibil.com/ 

1) RBI Guidelines – Prudential Norms on Income Recognition and Asset Classification and Provisioning – 2001

In line with the international practices and as per the recommendations made by the M. Narasimham committee, RBI had introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks in 1993 so as to move towards greater consistency and transparency.

As per the guidelines, the policy of income recognition and asset classification was made objective and based on record of recovery rather than on any subjective considerations. The provisioning requirement was also made on the basis of the classification of assets based on the period for which the asset remained non-performing and the availability of security and the realizable value thereof.

A ‘non-performing asset’ (NPA) was defined as a credit facility in respect of which the interest and/ or installment of principal remained ‘past due’ for a specified period of time. The specified period was reduced in a phased manner from 1993 to 1995 from 4 quarters to 2 quarters. Further an amount due under any credit facility was treated as “past due” when it was not been paid within 30 days from the due date. 

In 2001, it was decided to dispense with ‘past due’ concept. an account was treated over due when any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.

From April 2001, a Non-performing Asset (NPA) was an advance where

i) interest and/or instalment of principal remain overdue for a period of more than 180 days in respect of a Term Loan,
ii) the account remains ‘out of order’ for a period of more than 180 days, in respect of an Overdraft/Cash Credit (OD/CC),
iii) the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted,
iv) interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and
v) any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.

For OD/CC accounts: An account was treated as ‘out of order’ if the outstanding balance remained continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account was less than the sanctioned limit/drawing power, but there were no credits continuously for six months as on the date of Balance Sheet or credits were not enough to cover the interest debited during the same period, these accounts were to be treated as ‘out of order’.

Further NPAs were classified in following three categories based on the period for which the asset remained non-performing and the realisability of the dues:

a) Sub-standard Assets – Account which was NPA for a period less than or equal to 18 months.

b) Doubtful Assets – Account which has remained NPA for a period exceeding 18 months.

c) Loss Assets – where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly

Provisioning requirement was also increased in phased manner as under:

Loss Assets – 100% provision had to be made.

Restructuring/ Rescheduling of Loans – RBI introduces special dispensation

So far where a standard asset terms were renegotiated or rescheduled after commencement of production, Banks had to classify these accounts as sub-standard or NPA. These accounts would remain in such category for at least one year of satisfactory performance under the renegotiated or rescheduled terms. In the case of sub-standard and doubtful assets also, rescheduling did not entitle Banks to upgrade the classification of advance automatically unless there is satisfactory performance under the rescheduled / renegotiated terms.

After 2001 where an account was restructured in the following stages 
a) before commencement of commercial production;
b) after commencement of commercial production but before the asset has been classified as sub standard,

RBI gave a special dispensation wherein the principal portion need not be downgraded to sub standard category provided the loan/credit facility is fully secured. Interest portion also need not be downgraded to sub standard category provided the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved.

After 2001, where an account was restructured after commencement of commercial production and after the asset had been classified as sub standard, these accounts would continue to remain in substandard category. The sub-standard accounts which were subjected to restructuring would be eligible to be upgraded to the standard category only after the specified period (i.e. a period of one year after the date when first payment of interest or of principal, whichever is earlier, falls due, subject to satisfactory performance during the period). The amount of provision was also allowed to be reversed after the one year period (net of the amount provided for the sacrifice in the interest amount in present value terms).

The above changes laid the foundation for the phase of restructuring in India. Lenders were allowed to restructure the loans without downgrading the account or making additional provisioning related to corresponding asset classification category.  

2) Corporate Debt Restructuring (CDR) mechanism

Corporate Debt Restructuring (CDR) mechanism was introduced by RBI in August 2001 and it was a voluntary non-statutory system wherein lenders came together and formed a forum. These lenders were bound by the Inter-Creditor Agreement and the principle of approvals by super-majority. CDR cell was housed in IDBI Bank. The mechanism intended to cater to corporates having a multiple banking arrangement or syndicated or consortium banking arrangement with outstanding exposure of Rs. 10 crores and above. Borrower was also required to execute a Debtor Creditor Agreement, in order to make terms of restructuring binding on him once approved by the CDR Empowered Group (CDR EG)

Under the CDR mechanism, the regulator allowed lenders to defer their interest and principal payments, allowed lenders to provide additional funding and required promoters to infuse more capital and provide personal and/or corporate guarantees. The regulatory even allowed special dispensation/regulatory forbearance to lenders by permitting lenders to not categorising these borrowers as NPAs, once the restructuring plan was implemented. The idea was to give corporates time to resolve financial stress and commence payment of principal and interest once the company has revived.

The issue with this mechanism was, most of the companies never revived but the payment to lenders got postponed and the build-up of NPA in the system did not reverse. Further, Lenders failed to monitor once the restructuring scheme got implemented whether the cause of financial stress is resolved. Lender with their short-sighted view were only bothered that they do not have to classify the asset as NPA or make additional provisions immediately. This led to lenders approving restructuring scheme that were based on aggressive business assumptions and sometimes unrealistic assumption.

3) Present Status of 1 & 2 above

Corporate Debt Restructuring (CDR) mechanism

In 2013 RBI reviewed Prudential Guidelines on Restructuring of Advances by Banks and Financial Institutions and in May 2013 vide circular DBOD.BP.BC.No.99/ 21.04.132/2012-13 dated May 30, 2013 RBI decided to withdrawn the regulatory forbearance/special dispensation on restructurings with effect from April 1, 2015 (with the exception of provisions related to changes in Date of Commencement Commercial Operations (DCCO) for projects under implementation in respect of infrastructure as well as non-infrastructure project loans).

With this change a standard account on restructuring (for reasons other than change in DCCO) would be immediately be classified as sub-standard on restructuring. Also the non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per the regulatory guidelines. 

With this the CDR forum and the CDR mechanism gradually became redundant 

RBI Guidelines – Prudential Norms on Income Recognition and Asset Classification and Provisioning – 2015

The period of 180 days of NPA classification was reduced further to 90 days by March 31, 2004 and gradually the timelines for asset classification and provisioning requirement have also been made strict in line with international best practices. As per guidelines applicable today  (i.e. as per Master circular on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances date July 1, 2015) applicable guidelines are as under:

A Non-performing Asset (NPA) is an advance where

i) interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a Term Loan,
ii) the account remains ‘out of order’, in respect of an Overdraft/Cash Credit (OD/CC),
iii) the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
iv) interest and/or instalment of principal remains overdue for two crop seasons for short duration crops, and one crop season for long duration crops
v) the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.
vii) in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

For OD/CC accounts: An account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 90 days. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as ‘out of order’.

Further NPAs is classified in following three categories based on the period for which the asset remained non-performing and the realisability of the dues:

a) Sub-standard Assets – Account which has remained NPA for a period less than or equal to 12 months.

b) Doubtful Assets – Account if it has remained in the substandard category for a period of 12 months.

c) Loss Assets – where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly

Provisioning requirement now stands as under:

Loss Assets – 100% provision has to be made.

1) The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 is a powerful instrument in the hands of the banks and financial institutions (FIs) as secured creditors. The act mainly provides for establishment of Securtisation and Asset Reconstruction Companies and gives power to Reserve Bank of India (RBI) to regulate these companies. 

The act also empowers Banks & Financial Institution (Secured Creditor) to enforce security by taking possession of assets or changing management of the company without the intervention of the courts. As per the provisions of the SARFAESI Act, once the borrower account has turned NPA, Bank or FI can issue notice to the borrower. Within 60 days the borrower is required to either discharge his liability or raise objection for the notice issued under the SARFAESI Act. 

If the the Borrower fails to discharge the liability or Bank/FI is not satisfied with the objections raised by the borrower, the act empowers Banks/FI to following:

a) take possession of the secured assets including the right to lease, assignment or sale

b) take over the management of the business of the borrower

c) appoint any person to manage the secured assets 

d) require any debtor of the borrower at any time to pay the Secured Creditor all the amounted owed to the borrower

In case the borrower is aggrieved by the actions taken by the Secured Creditor under the act, he can file a appeal u/s 17 of the SARFAESI Act before the Debt Recovery Tribunal (DRT). DRT will try to dispose off the matter in 60 days (or maximum 4 months). 

Borrower or Secured Creditor aggrieved by the order of the DRT can file an appeal before the Debt Recovery Appellate Tribunal (DRAT). However, in case of an aggrieved borrower, he will have to deposit with the
Appellate Tribunal 50% of the amount of debt due from him, as claimed by the secured creditors or amount determined by the Debts Recovery Tribunal, whichever is less. DRAT has the power to reduce this amount to 25%. 

2) Projects under Implementation – 2002

RBI observed that despite substantial time overrun in the projects under implementation, the underlying loan assets remained classified in the standard category merely because the project continued to be under implementation. Significant time overrun in a project adversely affected its viability and the quality of the asset deteriorated. Hence RBI felt a need to stipulate an objective and definite time-frame for completion of projects so as to ensure that the loan assets relating to projects under implementation were appropriately classified and asset quality was correctly reflected.

Accordingly, RBI decided to extend the norms on income recognition, asset classification and provisioning to banks with respect to industrial projects under implementation, which involved time overrun.

As regards the projects to be financed by the FIs/ banks, RBI stipulated that the date of completion of the project should be clearly spelt out at the time of financial closure of the project. In such cases, if the date of commencement of commercial production extended beyond a period of 6 months after the date of completion of the project, as originally envisaged at the time of initial financial closure of the project, the account had to be treated as a sub-standard asset/NPA.

There have been number of amendments to the clause related to Project Under Implementation and RBI has gradually relaxed the time lines for classification of project asset as substandard/NPA due to delay in implementation over a period of time. 

3) Projects under Implementation – 2015

RBI has over the years 2002 relaxed the norms for downgrading the projects under implementation when the completion of projects is delayed for legal and other extraneous reasons like delays in Government approvals etc. (i.e.  factors, which are beyond the control of the promoters), which may lead to delay in project implementation and involve restructuring / reschedulement of loans by banks.

As per the RBI guidelines, for all projects financed by the FIs/ banks , the ‘Date of Completion’ and the ‘Date of Commencement of Commercial Operations’ (DCCO), of the project should be clearly spelt out at the time of financial closure of the project and the same should be formally documented. These should also be documented in the appraisal note by the bank during sanction of the loan.

RBI has also stipulated that all project loans will be divided into the following two categories:

a) Project Loans for infrastructure sector

b) Project Loans for non-infrastructure sector

Accordingly, the following asset classification norms would apply to the project loans before commencement of commercial operations: 

A) Deferment of DCCO without restructuring of repayment terms

Banks need not treat a project loans as restructuring provided deferment of DCCO and consequential shift in repayment schedule for equal or shorter duration is as under and all other terms and conditions of the loan remain unchanged

a) Project Loans for infrastructure sector – revised DCCO is extented upto 2 years of original DCCO

b) Project Loans for non-infrastructure sector – revised DCCO is extented upto 1 years of original DCCO

B) Deferment of DCCO with restructuring of repayment terms

Banks need not treat a project loans as NPA, provided deferment of DCCO is as under and Lenders have restructured the loans 

a) Project Loans for infrastructure sector (involving court case) – revised DCCO is extented upto 4 years of original DCCO

b) Project Loans for non-infrastructure sector – revised DCCO is extented upto 2 years of original DCCO

c) Project Loans for infrastructure sector (not involving curt case) – revised DCCO is extented upto 2 years of original DCCO

The above can be summarized as per below table. Deferment in DCCO along with restructuring will be subject to additional provisioning by lenders.

C) Projects under Implementation – Change in Ownership:

In order to facilitate revival of the projects that are stalled primarily due to inadequacies of the promoters and if a change in ownership takes place any time within the timelines as per A & B above or before the original DCCO, banks can further extend the DCCO of the project by additional two years and  also consequentially shift/extend repayment schedule, if required, by an equal or shorter duration without any change in asset classification of the account to substandard/NPA. However following conditions needs to be complied with:

1) The new promoters should acquire at least 51% of the project. In case of a non resident he should acquire higher of 26% or applicable foreign investment limit.

2) Project should be viable and acquisition should be by a new promoter and he should not belong to the existing promoter group

3) Asset classification status on the ‘reference date’ would continue. Reference date will be the date of acquisition or date of execution of preliminary binding agreement where acquisition is completed within a period of 90 days.

4) DCCO and repayment schedule can be extended upto 85% of the economic life/concession period of the project

The timelines for extensions of DCCO allowed without making any change in asset classification status under A, B & C can be summarized as under:

D) Change in scope and size of the project:

Any change in the repayment schedule of a project loan caused due to an increase in the project outlay on account of increase in scope and size of the project, would not be treated as restructuring if:

(a) The increase in scope and size of the project takes place before commencement of commercial operations of the existing project.
(b) The rise in cost excluding any cost-overrun in respect of the original project is 25% or more of the original outlay.
(c) The bank re-assesses the viability of the project before approving the enhancement of scope and fixing a fresh DCCO.
(d) On re-rating, (if already rated) the new rating is not below the previous rating by more than one notch.

Review of Prudential Guidelines on Restructuring of Advances by Banks and Financial Institutions

Restructuring carried out under the CDR framework and then existing restructuring framework was time consuming and only led to postponement of asset classification and provisioning. The guidelines/framework on restructuring existing at that time did not really reduce the NPAs in the banking sector. Most of the cases that were restructured under the CDR framework failed to revive company. Based on the recommendations of the Working Group Chaired by Shri B. Mahapatra, RBI reviewed the then existing prudential guidelines on restructuring of advances by banks/financial institutions in May 2013.

Major changes carried out were as under:

1) Withdrawal of Regulatory Forbearance effective 2015 – Existing guidelines allowed regulatory forbearance (i.e. standard accounts were allowed to retain their asset classification and NPA accounts were allowed not to deteriorate further in asset classification on restructuring) on asset classification of restructured accounts which was decided will be withdrawn. However, due to macroeconomic situation it was decided to withdraw the forbearance after 2 years (i.e. effective from April 1, 2015).

2) Relaxation of timelines for extension of DCCO in case of projects under implementation was granted (discussed in detail in 2002 tab)

3) Increased the provisioning requirements for banks for restructured accounts

4) Provisions related to upgradation of NPA accounts, viability parameters, promoters contribution for lenders sacrifice, conversion of debt to equity, right to recompense and promoter personal guarantee were made more strict due to misuse of various restructuring guidelines by Companies and Lenders.

1) Framework for Revitalising Distressed Assets in the Economy

The economy was slowing down and a number of companies/projects were under stress. There was also an adverse impact due to contraction of manufacturing sector as investments declined due to the uncertainty created by spate of scams which weakened and slowed down the decision making process of the government and delayed implementation of key economic reforms. The government had slipped into a phase of indecision for the key economic policies often referred to as phase of “policy paralysis”.  As a result, the Indian banking system saw an increase in Non-Performing Assets (NPAs) and restructured accounts during these years. Hence RBI introduced a Framework for corrective action plan that would incentivise early identification of problem account, timely restructuring of accounts which were considered to be viable and encouraged lenders for taking prompt steps for recovery or sale of unviable accounts.

The main proposals of the Framework were:

i. Centralised reporting and dissemination of information on large credit.

ii. Early formation of a lenders’ committee with timelines to agree to a plan for resolution.

iii. Incentives for lenders to agree collectively and quickly to a plan – Accelerated provisioning if no agreement can be reached on a resolution plan.

iv. Improvement in restructuring process: Independent evaluation of large value restructurings mandated.

v. Various other measures such as more expensive future borrowing for non cooperative borrowers, liberal regulatory treatment for asset sales.

Early Recognition of Stress and Setting up of Central Repository of Information on Large Credits (CRILC):

As a measure to identify potential NPAs, RBI in 2002 had suggested that banks introduce a new asset category between ‘Standard’ and ‘Sub-standard’ for internal monitoring. This asset category was termed as ‘Special Mention Assets’ (SMA) in line with international practice. In 2014, Banks were required to have three sub-categories under the SMA category as given below

a) SMA 0 – Principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress
b) SMA 1 – Principal or interest payment overdue between 31-60 days
c) SMA 2 – Principal or interest payment overdue between 61-90 days

Central Repository of Information on Large Credits (CRILC) was established to collect, store, and disseminate the above data to other lenders as well in order to detect signs of stress among all the lenders. Banks are required to furnish credit information to CRILC for all their borrowers having aggregate fund-based and non-fund based exposure of Rs.5 Crore and above.  

Further RBI also mandated that where an account is reported as SMA-2 by one or more lending banks/notified NBFCs it would trigger the mandatory formation of a Joint Lenders’ Forum and formulation of Corrective Action Plan (CAP). 

Corrective action plan would include any of the following which had to be agreed by lender in Joint lenders Forum (JLF mechanism) in a time bound manner:

a) Rectification

b) Restructuring

c) Recovery 

Penal measures in the form of higher provisioning was introduced where lenders did not reach an agreement in a time bound manner. Detailed guidelines were introduced by RBI on Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP) vide circular DBOD.BP.BC.No.97/ 21.04.132 / 2013-14 dated February 26, 2014.

2) Framework for Revitalising Distressed Assets in the Economy – Refinancing of Project loans:

For cases where projects were refinanced by way of take-out financing, RBI (vide circular circular DBOD.BP.BC.No.98/21.04.132/2013-14 dated February 26, 2014) permitted fixing a longer repayment period without treating the same as restructuring/substandard if the following conditions were satisfied:

a) account is ‘standard’ in the books of the existing banks, and should have not been restructured in the past;
b) Such loans should be substantially taken over (more than 50% of the outstanding loan by value) from the existing financing banks / financial institutions; and
d) The repayment period should be fixed by taking into account the life cycle of the project and cash flows from the project.

Where aggregate exposure of the lenders to the project was above Rs. 1000 Cr and DCCO was achieved, the above conditions were further relaxed by RBI vide circular DBOD.BP.BC.No.31 /21.04.132 /2014-15 dated August 7, 2014, if 

a) the total repayment period does not exceed 85% of the initial economic life of the project / concession period;
b) Such loans are ‘standard’ in the books of the existing banks at the time of the refinancing;
c) a minimum 25% of the outstanding loan by value is taken over by a new set of lenders from the existing financing banks/Financial Institutions

3) Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries (5/25 Scheme of RBI)

Infrastructure and core industries projects have long gestation periods and large capital investments. The long maturities of such project loans consist of the initial construction period and the economic life of the asset /underlying concession period (usually 25-30 years). Banks were unable to provide such long tenor financing owing to asset-liability mismatch issues. Banks were restricted to finance to a maximum period of 12-15 years. After factoring in the initial construction period and repayment moratorium, the repayment of the bank loan was compressed to a shorter period of 10-12 years. As a result of these factors, some of the long term projects experienced stress in servicing the project loans. 

Through circular (DBOD.No.BP.BC.24/21.04.132/2014-15 dated July 15, 2014) RBI permitted banks to fix longer amortization period for loans to projects in infrastructure and core industries sectors. RBI permitted Project loans of 25 years or more (based on the economic life or concession period of the project) with periodic refinancing (every 5-7 years). The repayment at the end of this period of 5-7 years (equal payments corresponding to the Original Amortisation Schedule) could be structured as a bullet repayment, with the intent specified up front that it will be refinanced. That repayment can be taken up by the same lender or a set of new lenders, or combination of both, or by issue of corporate bond, as Refinancing Debt Facility, and such refinancing may repeat till the end of the Amortisation Schedule. 

Further where project has achieved commercial operation, RBI permitted modification of the repayment schedule in line with these guidelines once without treating such accounts as ‘restructuring’ subject to conditions as under:

a) The loan is a standard loan as on the date of change of Amortisation Schedule;
b) Net present value of the loan remains the same before and after the change in Amortisation Schedule; and
c) The entire outstanding debt amortisation is scheduled within 85% of the economic life of the project as prescribed in the circular

1) Strategic Debt Restructuring Scheme

As part of the Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP)  (circular dated February 26, 2014), RBI introduced the concept of  strategic debt restructuring (SDR) vide circular DBR.BP.BC.No.101/21.04.132/2014-15 dated June 8, 2015. Under the scheme, in order to provide banks with enhanced capabilities to initiate change of ownership in accounts that had failed to achieve the projected viability milestones, banks could convert loan dues in to equity shares of stressed assets. 

Lenders were required to divest their holdings in the equity of the company as soon as possible where SDR was invocked. On divestment of banks’ holding in favour of a ‘new promoter’, the asset classification of the account was allowed to be upgraded to ‘Standard’.

However, the quantum of provision held by the bank was not allowed to be reversed. Further RBI allowed Banks at the time of divestment of their holdings to a ‘new promoter’, to refinance/restructure the debt of the company without treating the exercise as ‘restructuring’.

2) Prudential Norms on Change in Ownership of Borrowing Entities (Outside Strategic Debt Restructuring Scheme)

In order to further enhance banks’ ability to bring in a change in ownership of borrowing entities where SDR was not invoked by lenders and existing promoters voluntarily decided to bring about the change in ownership, RBI permitted restructuring/refinancing of loans by existing lenders and further permitted upgrade of credit facilities to ‘Standard’ category upon such change in ownership. 

These guidelines were also part of the Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP) and was released through RCI  vide circular DBR.BP.BC.No.41/21.04.048/2015-16 dated September 24, 2015.

1) Scheme for Sustainable Structuring of Stressed Assets (S4A scheme)

2) Insolvency and Bankruptcy Code – 2016 (IBC)

Prior to IBC there were multiple laws and adjudicating forums that dealt with financial failure and insolvency of companies and individuals in India. Many of these laws even overlapped and getting a resolution for a creditor was time consuming and complicated. Recovery laws prior to IBC did not aid lenders for effective and timely recovery or restructuring of  assets. It was felt that reforms in the bankruptcy and insolvency regulations were critical for improving the business environment and alleviating distressed credit markets. Hence the Government introduced the Insolvency and Bankruptcy Code Bill in November 2015 and both houses of Parliament passed the Insolvency and Bankruptcy Code in 2016.

IBC is a uniform insolvency legislation which would apply to all companies, partnerships and individuals (other than banks and financial institutions). The IBC provides for two stages of insolvency process 

a) Insolvency Resolution Process

b) Liquidation Process

Following is the process under IBC applicable to a Corporate Debtor:

Corporate Insolvency Resolution Process (CIRP)

a) Under the Resolution process or CIRP, an operational or a financial creditors could make a reference before NCLT against the corporate debtor in case of default of an amount above (Rs. 1 lakh).

b) If admitted under CIRP, NCLT would appoint a Resolution Professional to take over the management of the corporate borrower and operate its business as a going concern as per the directions of a committee of creditors

c) The Committee of Creditor is constituted by only financial creditors and is responsible for the implementing a revival or a resolution plan. A resolution plan needs to be agreed by 66% of financial creditors by value. 

Liquidation Process

Liquidation is initiated against a corporate debtor if: 

a) 66% majority of the committee of creditor’s agrees to liquidate the corporate debtor; or

b) The committee of creditors do not approve a resolution plan within 180 days (or within the such extended period – 90 days);

1) Resolution of Stressed Assets – Revised Framework – February 12, 2018

RBI had issued circular DBR.No.BP.BC.101/21.04.048/2017-18 dated February 12, 2018 and introduced a revised framework for resolution of stressed assets. This circular also withdrew all the the extant schemes/ mechanism/ instructions issued by RBI such as Framework for revitalising distressed assets, Corporate debt restructuring scheme, Flexible structuring of existing long term project loans, Strategic Debt  Restructuring Scheme (SDR) and change in ownership outside SDR, Scheme for Sustainable Structuring of Stressed Assets (S4A) and Joint Lenders’ Forum mechanism. 

The circular stipulated that as soon as there is default, the lenders must initiate actions to cure the default (Resolution Plan) which may involve

a) repayment of entire overdues within a period of 180 days from the 1st default

b) restructuring of the loans

c) change of ownership

d) sale of exposure to other entities/investors

The circular also stipulated independent evaluation of the resolution plan by credit rating agencies in case the resolution plan involved restructuring or change in ownership. 

In case the resolution plan involved restructuring of loans or change in ownership and the plan was not implemented within the stipulated timelines, the circular made it compulsory for lenders to file an application for insolvency under Insolvency and Bankruptcy Code, 2016 (IBC) before the NCLT.  

Hence this circular was struck down by the Supreme Court of India vide its judgement dated April 2, 2019 in the case of Dharani Sugars and Chemicals Limited v. Union of India on the ground of being ultra vires to section 35AA of the Banking Regulation Act, 1949. Consequently, all actions taken under this Framework against debtors under section 7 of the IBC became null and void. Pursuant to this judgement, RBI vide press release dated April 4, 2019 declared that it will issue a revised circular for expeditious and effective resolution of stressed assets.

Accordingly, on June 7, 2019, RBI introduced Prudential Framework for Resolution of Stressed Assets in the wake of the judgement of the Hon’ble Supreme Court of India.

1) Prudential Framework for Resolution of Stressed Assets – June 7, 2019

Under the revised framework RBI introduced a system of dis-incentivising lenders in the form of requiring additional provisioning in case of delay in implementation of resolution plan or initiation of insolvency proceedings. This was a major change as compared to the previous circular dated February 12, 2018 which stipulated compulsory reference to IBC in case of failure in implementing resolution plan within the stipulated timelines. 

This circular continues to supersede all the earlier resolution schemes such as S4A, SDR, 5/25 etc. The circular also stipulates execution of Inter Creditor Agreement (ICA) among lenders and implementation of resolution plan within specified timeline.

Under the ICA, a resolution plan approved by 75% by value and 60% by number will be binding on all the lender. This was an important step, as February 12, 2018 circular required approval of all lenders.

Further independent credit evaluation of the resolution plan in case of restructuring plan or change of ownership is also stipulated which is in line with the February 12, 2018 circular. 

The Circular also provides for:

a) Early recognition and reporting of default in respect of large borrowers by banks, FIs and NBFCs.

b) Complete discretion to lenders with regard to design and implementation of resolution plans.

c) Withdrawal of regulatory forbearance for asset classification (special dispensations on restructuring).

d) Future upgrades of asset classification is being made contingent on a meaningful demonstration of satisfactory performance after a reasonable period as well as after a reasonable amount of debt is paid to the lenders.