Banks wants February 12 circular back with amendments

Indian banks, which are struggling to resolve a stockpile of Rs 10 lakh crore of bad loans, have asked the Reserve Bank of India (RBI) to reinstate its February 12 circular with amendments. After the Supreme Court quashed the February 12 circular, bankers say that resolution processes are in a limbo, particularly with no clarity from the central bank on a new prescription to deal with non-performing assets (NPAs).

The circular, which had come out with the framework of resolving high-value debt of Rs 2,000 crore and above, forced banks to take faster decisions on resolving their stressed loans. The circular had definite timelines and allowed banks to convert debt into equity at Re 1 a share in cases where the company had a negative net worth.

The banks have asked the regulator for certain relaxations to facilitate faster resolutions when borrowers are unable to repay their loans. A resolution plan, banks have requested, should have 66% of approval instead of 100% approval, which was the condition in the February 12 circular.

"If consensus for resolution is kept at 100%, one bank with a small outstanding can hold up the resolution process," said another banker who deals with the legal aspects of the NCLT cases. Banks have asked the regulator to upgrade an account when 10% of the outstanding is repaid as against the current stipulation of 20% of the outstanding to be repaid. Also, the timelines for implementing revival plans for the large borrowers to be increased from the current 180 days to 270 days, considering the complexities involved and consensus to be reached among various banks, which would require approvals from their respective Boards.

The circular was particularly useful for the banks to convert debt into equity at Re 1 a piece which made it easier for banks to enjoy an upside if there is an appreciation in the share price.

Banks have also put across a more realistic framework to implement resolution process like being allowed to resolve the stress in repayment in 30 days, rather taking action immediately even if there is a one day default. This, banks say, is a reasonable time to initiate steps to address the stress in the account or initiate recovery action.

"It could be a stress due to an external environment. So if recovery process is initiated immediately the company will never be able to recover," said a banker, who looks at cases that flow into the national company law tribunals, which are bankruptcy courts set up to fast-track the resolution of bad loans. The circular has also asked banks to file a corporate insolvency resolution process (CIRP) in the NCLT within 15 days of a default. Bankers have, however, said that a 15-day window is too short and a 45-day window be allowed to file the CIRP.

February 12 circular had withdrawn all the existing refinancing options for project loans. Banks have now asked the regulator to clarify whether project loans where the commencement of operation date (COD) has been achieved and does not have any financial stress will be considered as restructuring.