Doubtful / Loss assets / AUCA are not generally considered amenable to any rehabilitation efforts and hence, these assets are being clubbed so that the focus of the review will shift entirely to various means of recovery, i.e. legal action, compromises, sale of assets to Securitisation Companies (SCs) / Reconstruction Companies (RCs) such as ARCIL, enforcement of security rights under SARFAESI Act 2002, assignment of debt, assignment of decree, etc. AUCA is also included for structured review, as recovery efforts in these accounts may not have been fully exhausted. Further, there may be accounts which have deteriorated to Doubtful/Loss asset category due to mere passage of time and not due to deterioration of security and are still viable. In such cases also, restructuring should be examined as the first option.
(ii) Cut-off point :
Rs.10 lac and above (Outstandings)
(Accounts below the cut-off level are not covered by the structured reporting norms. However, in these cases, branches would formulate and pursue the account specific action plans as hitherto, with the approval of the sanctioning authority. In addition, in RNW, all accounts above Rs.1 lac but below Rs.10 lac may be reported monthly, on a consolidated basis, to the controller for purpose of monitoring. The Circles may also put in place a suitable structured review of these accounts (Rs.1 lac to Rs.10 lac), taking into account the local situation and requirements.)
(iii) Reviewing Authority :
The authority structure for review of Doubtful / Loss / AUCA assets would be as under:
Outstandings Reviewing authority
Rs.10 lacs to Rs.1 cr. ZCC in RNW
CCC-II in CNW (all accounts up to Rs.1 cr.)
Above Rs.1 cr.
(including above Rs.5 cr.) Circle level NPA task force (CirMAC)
Above Rs.5 cr. High level NPA task force at
Corporate Centre
• Henceforth, reports on sub-standard assets above Rs.5 cr. need not be submitted to Corporate Centre for review by the high level NPA Task Force as it would review only Doubtful / Loss / AUCA above Rs.5 cr.
• LHOs would submit reports on Doubtful / Loss / AUCA accounts above Rs.5 cr. to CGM (Credit Mgmt.) as per format advised vide Cr.M/NPAM-I/ARP/296 dated 6.6.03. At the Circle level also the same format may be used for structured review of such accounts.
• Accounts below the cut-off level are not covered by the formal reporting. However, in these cases, branches and their controllers would formulate and pursue the account specific action plans as hitherto.
• Doubtful / Loss assets may also be considered for restructuring, subject to their viability.
• The existing authority structure prescribed for removal of entries from AUCA would continue separately.
V. Rationale for the above integrated approach:
The primary intent behind the new integrated approach detailed above is to ensure that a SMA does not slip to sub-standard or a sub-standard account to Doubtful / Loss category due to lack of timely finance or reliefs / concessions. The first step to achieve this objective would be to identify stressed assets quickly and to determine whether the problems are of the temporary nature or whether they are likely to persist and affect the asset quality if proactive action is not taken. The restructuring plan thereafter should be aimed at units whose intrinsic viability is beyond doubt and which have genuine cash flow problems and which have defaulted for reasons beyond their control. It may be ensured that only borrowers with genuine intent to restructure the units are supported. The Management’s ability to turnaround the unit would also be a critical consideration.
The integrated approach being introduced is expected to bring greater focus on review of stressed assets so as to quickly identify accounts amenable to restructuring. The Bank’s policy would be that in cases where restructuring is considered feasible, branches would consider restructuring as the first option in management of stressed assets. To give the desired thrust to restructuring across the Bank, a uniform approach to holding on operations and reliefs / concessions, but with necessary in-built flexibility is being put in place. It is also expected that wherever restructuring is not considered feasible on account of non-viability or any other reason, the branches would quickly consider exit option or the usual steps for recovery.
VI. Reliefs and concessions – a uniform approach :
a. Extension of RBI norms on reliefs and concessions to weak / sick SSI units to potentially viable units in other sectors :
RBI had in January’02, as part of the revised guidelines for rehabilitation of sick SSI units, laid down broad norms for reliefs and concessions which can be extended by banks / FIs to potentially viable sick units (details are given in Annexure 4). RBI also clarified that banks will also have the freedom to extend reliefs and concessions beyond the laid down parameters in deserving cases. Given the RBI’s simple and easily implementable approach to reliefs/ concessions, the same may be extended across the Bank to various categories of advances as given below :
(i) Non-CDR , Non-BIFR manufacturing units in C&I segment
(ii) Non-CDR, Non-BIFR manufacturing units in AGL segment. (While no minimum loan size is being prescribed, it may be advisable to extend the approach only to relatively larger loans in AGL segment.)
(iii) In SSI sector, units falling within the RBI’s definition of a sick SSI unit would continue to be eligible for reliefs and concessions as per RBI guidelines. SSI units which do not readily fall within the RBI’s definition of sick SSI unit may also be extended reliefs and concessions as per RBI guidelines, if they require immediate support through restructuring etc. to retain their viability. In other words, complying with the RBI’s definition of a sick SSI unit need not be necessarily reckoned as a pre-condition for extending holding on operations and rehabilitation / restructuring with reliefs and concessions to otherwise deserving SSI units.
(In all cases above, reliefs and concessions as per RBI guidelines may also be extended to SMAs.)
(iv) Though RBI’s norms for reliefs and concessions to potentially viable units are primarily intended for manufacturing units, non-manufacturing sectors such as Trade & Services, small business and personal segment may also be considered for rehabilitation / restructuring. In such cases, rescheduling of term loans, if any, and/ or stipulating repayment / regularization programme in cash credit facility would generally suffice. Interest concessions may be extended only highly selectively.
Any concession within the RBI guidelines may be approved by the appropriate sanctioning authority. The applicable concessionary interest rate structure (formulated by our Bank within the RBI guidelines) are as under:
Relief measure Standard rate of interest for sanctions Minimum rates of interest (subject to AC by CCC-I & above) Period of concession
Funding of interest dues on cash credit and term loan. No interest
No interest Not exceeding 3 years
Conversion of irregular portion of cash credit account into WCTL 1.5% below SBAR 3% below SBAR Not exceeding 5 years
Funding of cash losses till break-even level 1.5% below SBAR 3% below SBAR Up to the period of break-even level
Existing working capital 1.5% below SBAR 3% below SBAR Not exceeding 3 years
Additional working capital SBAR 1.5% below SBAR Not exceeding 3 years
Contingency loan assistance of up to 15% of estimated cost of rehabilitation SBAR 1.5% below SBAR Not exceeding 3 years
Margin money for working capital and funds for start-up expenses 1.5% below SBAR 3% below SBAR Not exceeding 3 years
(All the above interest rate concessions would be subject to annual review depending on the performance of the units.)
Any reliefs and concessions within the parameters given in columns (1) and (2) above would be approved by the appropriate sanctioning authority. It may be noted that as per the Scheme of Delegation of Financial Powers, Advances and Allied Matters, the authority empowered to sanction the loans and advances to a unit, including the additional amounts proposed under the rehabilitation package, shall have the powers to sanction a rehabilitation package including other reliefs and concessions (Chapter II, para 2.22 on page 45 of the Compendium of Instructions on Scheme of Delegation of Financial Powers current as on 1.1.99).
Any concession, over and above the parameters given in columns (1) and (2) but subject to the minimum rates given in column (3), would be subject to Administrative Clearance (AC) by CCC-I in respect of proposals falling within the powers of CCC-II & below. For others, no AC would be required.
In case of accounts transferred to PB/RD account or later written off, rehabilitation / restructuring may be considered highly selectively, subject to AC from the authority who permitted transfer to PB/RD or permitted write off.
b. Extension of the flexible approach to reliefs and concessions under Corporate Debt Restructuring (CDR) mechanism to other potentially viable units not eligible under CDR :
The RBI norms on reliefs and concessions to sick/weak units in SSI sector are largely restricted to funding of overdues and extension of additional loans at PLR or lower pricing. This has been the traditional approach to rehabilitation / restructuring in our banking system. However, there may be units, especially larger ones, where the capital structure and debt repayment obligations of a unit may have to be re-aligned to its achievable future cash flows, so that the unit continues to be viable and thereby does not default in its obligations. This approach has already been introduced in our financial system through the CDR mechanism. The approach to restructuring under CDR mechanism is significantly different from the conventional approach of concessionary funding of existing dues. In addition to reliefs and concessions, such an approach would also involve the following:
• Arriving at the quantum of outstanding debt that can be retained for satisfactory Debt Service coverage and converting the balance amount into equity or equity linked instruments.
• Investment in equity as an alternative to sacrifices (waiver, write off etc.).
• Induction of strategic investor(s) / co-promoter(s).
• Broad basing of Board, appointment of independent Chairman, appointment of professional CEO etc.
• Appointment of whole-time Finance Director.
• Setting up of Asset Sale Committee
• Appointment of Special Concurrent Auditor.
• Change of Statutory Auditors.
• Appointment of Lenders’ Engineer / Monitoring Agency.
• Right to accelerate repayment / revoke package.
• Right of recompense.
• Co-ordination issues between lenders – sharing of security, escrow account etc.
Our Bank has adopted a fully flexible approach to reliefs and sacrifices under the Scheme to enable the Bank to arrive at realistic solutions on a case to case basis. Under this approach, it has been clearly laid down that there cannot be any uniform prescription for restructuring as each case will be unique. In addition to complexities involved in identifying the intrinsic value of such businesses, finalizing a suitable restructuring package involving concessions in pricing, downsizing of debt, conversion of sacrifices into equity, disinvestments, sale of businesses / assets, mergers, VRS, equitable sharing of securities between lenders and other stakeholders, etc. would require special skills and flexibility.
• The Scheme will cover only multiple banking accounts / syndication / consortium accounts with outstanding exposure of Rs.20 cr. and above by banks and FIs.
• The Scheme will not apply to accounts involving only one FI or one bank.
• The Scheme will be applicable to Standard and Sub-standard accounts, and also selectively to Doubtful accounts.
• There would be no requirement of the account / company being sick NPA or being in default for a specified period.
• Potentially viable cases of NPAs will get priority.
• Following BIFR cases, where aggregate outstanding exposure from banks and FIs is Rs.25 cr. & above, also would be eligible:
Cases registered with BIFR which have not come up for hearing as yet.
Cases declared sick and where BIFR has ordered work out of Draft Rehabilitation Scheme (DRS).
Companies which have no major issues (legal / concurrent) in respect of statutory authorities and State / Central Govt. agencies and there is possibility of them being addressed within a reasonable time frame of 3 months.
• Following BIFR cases will not be eligible:
Special Investigative Audit (SIA) has been recommended by BIFR
Sickness is being contested by way of appeal to AAIFR
Appeal has been made by one of the parties to AAIFR / Court against decision of BIFR
References:
www.rbi.org.in
