FAQs for RBI’s One-Time Loan Restructuring Scheme for COVID19
Reserve Bank of India has released frequently asked questions (FAQs) on one-time loan restructuring scheme for COVID-19 related stress. The scheme permits banks to restructure loans of borrowers who were regular in their repayments and did not have overdue of more than 30 days as of 01.03.2020, without demoting their asset classification to a non-performing asset (NPA).
Here are the questions and their answers as per the FAQs list issued by the RBI in Resolution Framework (or Framework):
✅ It is stated in Paragraph 4 of the Annex to the Resolution Framework that the reference date for the outstanding debt that may be considered for resolution (amount) shall be 01.03.2020. Does that mean that only debt outstanding as on 01.03.2020 can be resolved under the Resolution Framework?
The stipulation at the said Paragraph is a general clause regarding the date when the eligibility criteria for resolution under the Resolution Framework can be assessed. The particular application of the reference date in regards to deciding the eligibility of accounts for resolution under Part A & Part B of the Annex to the Framework have been specified separately in Paragraphs 6 & 13 respectively, i.e, the requirement that borrowers should be categorised as standard, but not in default for over 30 days with any lending institution as on 01.03.2020. The actual debt that can be considered for resolution will be the outstanding amount as on the date of invocation.
✅ Are all the farm credit that are listed in Paragraph 6.1 of Master Direction dated 07.07.2016 (as updated) ineligible under this Framework? Are the Joint Liability Group (JLG) loans provided to farmer households by Micro Finance Institutions (MFIs) eligible for resolution plan under the Framework?
All the farm credit of all lending institutions, including Non-Banking Financial Companies (NBFCs), as listed in Paragraph 6.1 of Master Direction FIDD.CO.Plan.1/04.09.01/2016-17 dated 07.07.2016 (as updated), except for loans to allied activities (dairy, fishery, poultry, animal husbandry, bee-keeping & sericulture) are excluded from the scope of the Resolution Framework. However, subject to the above, loans provided to farmer households will be eligible for resolution under the said Framework if they don’t meet any other conditions for exclusions that are listed in the Resolution Framework.
✅ In real estate and other sectors, where a company may have multiple projects that are financed through multiple instruments, will the ICA, escrow account, & the financial parameters (including the prescribed thresholds) be applicable at the project level rather than the legal entity to which the lending institutions may have exposure?
The basic feature of Prudential Framework for Resolution of Stressed Assets dated 07.06.2019 is the requirement of ICA in regards to the entity to which lending institutions have exposure, and consequently of the Resolution Framework too. There is enough flexibility to the lending institutions to formulate ICAs regarding a legal entity to which they have exposure and that address the specific requirements of each borrower on a case to case basis, including developing different resolution approaches for different projects under the same borrower within an ICA. In the same way, apart from the escrow account needed to be set up at the legal entity level as demanded by the Resolution Framework, there is no restriction in setting up additional separate escrow accounts at each project level, in case the lenders desire. Only in respect of borrowers who belong to real estate sector, and have residential as well commercial real estate business, the stipulated thresholds for the financial parameters can be applied at the project level.
✅ It is mentioned in the Resolution Framework that the accounts that do not meet the eligibility conditions can be considered under the prudential framework that is applicable to the specific category of institutions. Does that mean the alternative resolution frameworks available to a specific category financial institutions, like Paragraph 2(1)(zc)(ii) of the Master Circular – The Housing Finance companies (NHB) Directions, 2010 for housing finance companies, & Paragraph 220.127.116.11 of the Master Circular – Income Recognition, Asset Classification, Provisioning & Other Related Matters – UCBs dated 01.07.2015 for Urban Co-operative Banks will continue to be applicable for borrowers who are not impacted by COVID?
For the borrowers who are eligible for resolution under the circular dated 06.08.2020 of Resolution Framework for COVID-19-related Stress, the circular dated 06.08.2020 will be applicable if a resolution process under the circular is invoked. The extant instructions as otherwise applicable will still be in force for other borrowers. However, if any entity is otherwise eligible under the Resolution Framework, only this Framework can be used for resolving the stress emerging out of the pandemic.
✅ Are microfinance loans available to individuals, including JLG borrowers, qualified for resolution under the Framework? Similarly, are Loans sanctioned to Self Help Groups (SHGs) that are engaged in non-farm activities eligible for the benefit under the Framework?
All loans that meet the eligibility criteria, unless covered by any specific exclusion listed in Paragraph 2 of the Annex to the Framework, subject to the clarification at Sl. No. 2 above, come under the scope of resolution under the Framework. These loans, if they don’t fall under any of the categories mentioned in Paragraph 2 of the Annex to the Framework, are eligible for resolution under Part A of the Annex if they come under the purview of “personal loans” as defined in the Circular DBR.No.BP.BC.99/08.13.100/2017-18 dated 04.01.2018 on “XBRL Returns – Harmonization of Banking Statistics”, even if they are not clearly classified as so in any regulatory/supervisory reporting, or under Part B of the Annex otherwise.
✅ It is stated in Paragraph 8 of the Annex to the Resolution Plan that resolution under this framework can be invoked not later than 31.12.2020 and must be implemented within 90 days from the invocation date. What are the meanings of ‘invocation’ & ‘implementation’ in this context?
In respect of eligible personal loans, the definitions of invocation & implementation have been given in Paragraphs 7 & 10 respectively of the Annex to the Framework. In respect of other eligible loans, invocation will be as per Paragraphs 14 & 15 of the Annex to the Framework whereas implementation will have the meaning as per Paragraphs 14-16 of the circular dated 07.06.2019 on Prudential Framework for Resolution of Stressed Assets.
✅ Is the Resolution Framework pertinent to all exposures, including investment exposures which are credit substitutes, such as corporate bonds, commercial papers, etc.?
The Resolution Framework can be invoked for resolution of all exposures of lending institutions to the eligible borrowers, including investment exposure. However, the Framework is without prejudice to all applicable guidelines as issued by the relevant financial sector regulators & other RBI departments in respect of any particular exposure.
✅ Are the various additional provisions mentioned in the Resolution Framework applicable to NBFCs that are following Indian Accounting Standards (IndAS)?
NBFCs that are required to comply with IndAS shall, as hitherto, continue to be directed by the guidelines duly approved by their Boards & as per ICAI Advisories for recognition of remarkable increase in credit risk & computation of Expected Credit Losses. However, various additional provisions prescribed in the circular dated 06.08.2020 will constitute the prudential floors for the purpose of Paragraph 2 of the Annex to the circular DOR (NBFC).CC.PD.No.109/22.10.106/2019-20 dated 13.03.2020 on Implementation of Indian Accounting Standards.
✅ Are the list of financial parameters mentioned by the Expert Committee and notified by RBI on 07.09.2020 applicable only to borrowers with exposure of more than Rs. 1500 crores or for all resolution plans to be undertaken in terms of the Framework?
The instructions in the circular dated 07.09.2020 are applicable in the case of all borrowers in respect of whom the resolution is being undertaken in terms of Part B of the Annex to the circular dated 06.08.2020 on Resolution Framework.
✅ Are the additional provisions mentioned under the Framework to be treated as specific provisions to be maintained or as general provisions that will partly qualify for inclusion as Tier 2 capital?
The various additional provisions given under the Resolution Framework are specific provisions that are to be maintained in respect of each exposure under consideration.
✅ Can lending institutions execute resolution plans involving DCCO or deferment of date of commencement of commercial operations in respect of projects under implementation in the Resolution Framework?
Restructuring of under implementation projects involving deferment of DCCO are excluded from the purview of the Resolution Framework. The extant regulations contained in Paragraph 4.2.15 of DBR.No.BP.BC.2/21.04.048/2015-16 dated 01.07.2015, DOR.No.BP.BC.33/21.04.048/2019-20 dated 07.02.2020 & the other relevant instructions as applicable to the specific category of lending institutions, already allow revisions of the DCCO & consequential move in repayment schedule without being treated as restructuring, subject to a maximum of 4 years for infrastructure projects and a maximum of 2 years for non-infrastructure projects (including commercial real estate exposures). Also, DCCO of projects may be extended by a further 2 years in case of change in ownership, subject to the conditions as specified in the above instructions.
✅ Is there any minimum cut off in regards to aggregate outstanding exposure with banking system for mandatorily signing ICA under the Framework? Also, are the ICA norms applicable to loans obtained by individuals for business purpose from 2 or more banks?
If there are multiple lending institutions having exposure to a borrower whose resolution is undertaken in as per Part B of the Annex to the Framework, all lending institutions with exposure to such borrower are needed to enter into ICA.
✅ It is stated in Paragraph 33 of the Annex to the Resolution Framework that Resolution plans regarding the accounts where the aggregate exposure of the lending institutions at the time of invocating the resolution process is Rs. 100 crores and above, will require an independent credit evaluation (ICE) by any one of the credit rating agencies (CRA) authorized by RBI under the Prudential Framework. For this purpose, what will be the minimum desirable ICE symbol?
Only those resolution plans that receive a credit opinion of RP4 or better for the residual debt from a CRA will be considered for implementation under the Framework. In case credit opinion is acquired from more than one CRA, all the credit opinions must be RP4 or better.
✅ The Government had changed the definition of MSME vide Gazette notification dated 26.06.2020. As the reference date for the Resolution Framework is 01.03.2020, which definition of MSMEs is applicable for the purpose of eligibility or resolution under the Resolution Plan?
For the determining the eligibility for resolution under the Framework, the applicable definition of MSME is the one that existed as on 01.03.2020.
✅ The circular dated 07.09.2020 has listed just a few sectors regarding which the threshold values for the mandatory financial parameters are prescribed. Does that mean the Resolution Framework is not applicable for the borrowers who belong to other sectors?
Resolution Framework is applicable to all eligible borrowers subject to the exclusions mentioned in Paragraph 2 of the Annex to the circular dated 06.08.2020. In case of those sectors where the sector-specific thresholds are not been specified in the circular dated 07.09.2020, lending institutions will make their own internal assessments regarding TOL/ATNW & Total Debt/EBITDA. However, the current ratio & DSCR in all cases will be 1.0 or above, and ADSCR will be 1.2 or above.
✅ If on 01.03.2020, a loan account was more than 30 DPD, but subsequently got regularised by receipt of overdue, will such accounts be considered eligible for resolution plan under the Framework?
Such accounts will be considered ineligible for resolution under the Framework as the said Framework is applicable only for eligible borrowers who were classified as standard, but not in default for more than 30 days as on 01.03.2020. However, such accounts can still be resolved under the Prudential Framework dated 07.06.2019.
✅ Will the following loan categories be classified as personal loans:
“Loan Against Property” loans availed for business purpose, but are secured by immovable assets.
Loans given to individuals where the property is in the name of the individual and a related company/non individual entity is a co-borrower on the loan structure to supplement the income for loan repayment.
If not, where will such categories of customers be covered for COVID-19 related stress?
In terms of the circular DBR.No.BP.BC.99/08.13.100/2017-18 dated 04.01.2018, the above exposures are not qualified as personal loans. In these cases, the resolution of eligible borrowers can be undertaken under Part B of the Annex to the Framework.