RBI has recently(12 August 2020) asked urban co-operative banks (UCBs) with assets of ₹2,000 crore or more to implement system-based asset classification from 30 June 2021. The Reserve Bank of India has imposed a monetary penalty on the State Bank of India. 13. i) When a bank sells its non ­performing financial assets to other banks, the same will be removed from its books on transfer. The asset shall attract provisioning requirement appropriate to its asset classification status in the books of the purchasing bank. 21.4 Acquisition of non-SLR securities by way of conversion of debt is exempted from the mandatory rating requirement and the prudential limit on investment in unlisted non-SLR securities, prescribed by the RBI, subject to periodical reporting to the RBI in the aforesaid DSB return. However, integrated housing projects comprising of some commercial space (e.g. Under extant instructions, CDR EG can approve or suggest modifications but ensure that a final decision is taken within a total period of 90 days, which can be extended up to a maximum of 180 days from the date of reference to CDR Cell. Activities. In the case of non-agricultural cash credit accounts, the account should not be out of order any time during the specified period, for a duration of more than 90 days. Prudential Guidelines on Restructuring of Advances by Banks. Such provision should be held in addition to the provisions as per existing provisioning norms as indicated in para 17.4.1 above, and in an account distinct from that for normal provisions. Any restructuring done without looking into cash flows of the borrower and assessing the viability of the projects / activity financed by banks would be treated as an attempt at ever greening a weak credit facility and would invite supervisory concerns / action. An extract of the list of these items is furnished in the Annex - 2. 2.1.2 A non ­performing asset (NPA) is a loan or an advance where; interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan. Banks should also have system generated segment wise information on non-performing assets and restructured assets which may include data on the opening balances, additions, reductions (upgradations, actual recoveries, write-offs etc. C-2: Framework for Revitalising Distressed Assets in the Economy - Refinancing of Project Loans, Sale of NPA and Other Regulatory Measures. The new lenders shall rank on par with the existing lenders for repayment and servicing of the dues since they have taken over the existing dues to the exiting lender. Further, reversal of excess provision will be limited to the extent to which cash received exceeds the NBV of the asset. In other words, extension or deferment of EMIs to individual borrowers as against to an entire class, would render the accounts to be classified as 'restructured accounts’. C&I/CIR/2013-14/9307 dated April 29, 2014. (b) All other terms and conditions of the loan remain unchanged. b) Conversion into equity, debentures or any other instrument: The amount outstanding converted into other instruments would normally comprise principal and the interest components. 2.1.4 In addition, an account may also be classified as NPA in terms of paragraph 4.2.4 of this Master Circular. 15.3 In the backdrop of extraordinary rise in restructured standard advances, these prudential norms were further revised by taking into account the recommendations of the Working Group (Chairman: Shri B. Mahapatra) to review the existing prudential guidelines on restructuring of advances by banks/financial institutions. The securities must be secured by an appropriate charge on the assets transferred. Lenders will have time till June 30, 2021 to complete this process. Pending disciplinary action by ICAI, the complaints may also be forwarded to the RBI (Department of Banking Supervision, Central Office) and IBA for records. 5.6.3 All the other features of the CDR system as applicable to the First Category will also be applicable to cases restructured under the Second Category. These guidelines shall also suitably address the operational difficulties experienced in the functioning of the CDR Empowered Group. (ii) Provisioning. As regards the regulatory treatment of ‘funded interest’ recognised as income and ‘conversion into equity, debentures or any other instrument’ banks should adopt the following: a) Funded Interest: Income recognition in respect of the NPAs, regardless of whether these are or are not subjected to restructuring/ rescheduling/ renegotiation of terms of the loan agreement, should be done strictly on cash basis, only on realisation and not if the amount of interest overdue has been funded. This is a prudential measure since the expected losses on exposures to such non-cooperative borrowers are likely to be higher. DBOD.No.BP.BC.9/21.04.048/2014-15 dated July 1, 2014, Availability of security / net worth of borrower/ guarantor, Upgradation of loan accounts classified as NPAs, Accounts regularised near about the balance sheet date, Asset Classification to be borrower wise and not facility-­wise, Accounts where there is erosion in the value of security, Advances to PACS/FSS ceded to Commercial Banks, Advances against Term Deposits, NSCs, KVP/IVP, etc, Loans with moratorium for payment of interest, Advances under rehabilitation approved by BIFR/ TLI, Transactions Involving Transfer of Assets through Direct Assignment of Cash Flows and the Underlying Securities, Provisions for advances at higher than prescribed rates, Guidelines for Provisions under Special Circumstances, GUIDELINES ON SALE OF FINANCIAL ASSETS TO SECURITISATION COMPANY (SC)/ RECONSTRUCTION COMPANY (RC), Procedure for sale of banks’/ FIs’ financial assets to SC/ RC, including valuation and pricing aspects, Prudential norms for banks/ FIs for the sale transactions, GUIDELINES ON PURCHASE/SALE OF NON PERFORMING ASSETS, Procedure for purchase/ sale of non performing financial assets, including valuation and pricing aspects, Prudential norms for banks for the purchase/ sale transactions, NPA Management – Requirement of an Effective Mechanism and Granular Data, Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries (Loans sanctioned after July 15, 2014), Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries (Loans sanctioned before July 15, 2014), Financing of Cost Overruns for Projects under Implementation, Prudential Norms Relating Refinancing of Exposures to Borrowers, General Principles and Prudential Norms for Restructured Advances, Eligibility criteria for restructuring of advances, Prudential Norms for Conversion of Principal into Debt / Equity, Prudential Norms for Conversion of Unpaid Interest into 'Funded Interest Term Loan' (FITL), Debt or Equity Instruments, Special Regulatory Treatment for Asset Classification, Applicability of special regulatory treatment, Other Issues / Conditions Relating to Restructuring by JLF / CDR Cell, Prudential Norms on Asset Classification and Provisioning, Wilful Defaulters and Non-Cooperative Borrowers, Effective Date of Implementation of the Framework, Bank Loans for Financing Promoters’ Contribution, Details of Gross Advances, Gross NPAs, Net Advances and Net NPA, List of relevant direct agricultural advances, Format for Computing Provisioning Coverage Ratio (PCR), Organisational Framework for Restructuring of Advances Under Consortium / Multiple Banking / Syndication Arrangements, List of circulars consolidated by the Master Circular, FIDD.CO.Plan.BC.54/04.09.01/ 2014-15 dated April 23, 2015, circular FIDD.No.FSD.BC.52/ 05.10.001/2014-15 dated March 25, 2015, Master Circular RPCD.SME&NFS.BC.No. Further repayment/refinancing of foreign currency borrowings outstanding with a bank, by way of rupee loans or another foreign currency loan (where permitted) or based on support (where permitted) in the form of Guarantees/Standby Letters of Credit/Letters of Comfort, etc. d) Banks should also disclose the total amount of advances for which intangible securities such as charge over the rights, licenses, authority, etc. Further, all restructuring packages must incorporate ‘Right to recompense’ clause and it should be based on certain performance criteria of the borrower. 17.2.4 In case, however, satisfactory performance after the specified period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner. Taking into account the comments received, the Reserve Bank issued the ‘Framework for Revitalising Distressed Assets in the Economy’ on its website on January 30, 2014, outlining a corrective action plan that will incentivize early identification of problem account, timely restructuring of accounts which are considered to be viable, and taking prompt steps by lenders for recovery or sale of unviable accounts. C. Non-Exhaustive Indicative List of Signs of Financial Difficulty. 2As a countercyclical measure, on February 7, 2014, banks were permitted to utilise upto 33 per cent of countercyclical provisioning buffer / floating provisions held by them as on March 31, 2013, for making specific provisions for non-performing assets, as per the policy approved by their Board of Directors. (c) Recovery - Once the first two options at (a) and (b) above are seen as not feasible, due recovery process may be resorted to. The JLF may decide the best recovery process to be followed, among the various legal and other recovery options available, with a view to optimising the efforts and results. Internationally income from non­-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. However, it may be shifted to another place if considered necessary, as may be decided by the Standing Forum. 4.2.4 Accounts with temporary deficiencies. 17.4.3 The total provisions required against an account (normal provisions plus provisions in lieu of diminution in the fair value of the advance) are capped at 100% of the outstanding debt amount. The CDR Cell may also take outside professional help. (c) Investment in debentures/ bonds/ security receipts/ Pass-through certificates issued by SC/ RC. 4.2.5 Upgradation of loan accounts classified as NPAs. 38. Lenders also have the option of forming a JLF even when the AE in an account is less than Rs.1000 million and/or when the account is reported as SMA-0 or SMA-1. DICGC / ECGC claims received and held pending adjustment, Part payment received and kept in Suspense Account or any other similar account, Balance in Sundries Account (Interest Capitalization - Restructured Accounts), in respect of NPA Accounts, Provisions in lieu of diminution in the fair value of restructured accounts classified as NPAs, Provisions in lieu of diminution in the fair value of restructured accounts classified as standard assets, Net NPAs {2-5(i + ii + iii + iv + v + vi)}, Net NPAs as percentage of Net Advances (7/6) (in %). 15 percent of the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge component. Prudential Norms on Capital Adequacy, Income Recognition, Asset Classification and Provisioning, etc. Banks/FIs will therefore be required to make higher provisioning as applicable to substandard assets in respect of new loans sanctioned to such borrowers as also new loans sanctioned to any other company that has on its board of directors any of the whole time directors/promoters of a non-cooperative borrowing company or any firm in which such a non-cooperative borrower is in charge of management of the affairs. RBI asks UCBs to implement system-based asset classification from June 2021 The UCBs having total assets of over Rs 2,000 crore as on March 31, 2020, will be required to implement the system-based asset classification from June 30, 2021, an RBI circular said 27.2 The decisions agreed upon by a minimum of 75% of creditors by value and 60% of creditors by number in the JLF would be considered as the basis for proceeding with the restructuring of the account, and will be binding on all lenders under the terms of the ICA. In such cases of conversion or re-­schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as NPA. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books. Restructuring of advances could take place in the following stages: before commencement of commercial production / operation; after commencement of commercial production / operation but before the asset has been classified as 'sub-standard'; after commencement of commercial production / operation and the asset has been classified as 'sub-standard' or 'doubtful'. Provide for maker checker authorisation /control for transactions (an illustrative list of transactions includes updating/modifying the internal accounts, customer accounts, parameters – both financial and non-financial that affect the status of the credit portfolio/loan/asset.) In respect of agricultural advances as well as advances for other purposes granted by banks to PACS/ FSS under the on-­lending system, only that particular credit facility granted to PACS/ FSS which is in default for a period of two crop seasons in case of short duration crops and one crop season in case of long duration crops, as the case may be, after it has become due will be classified as NPA and not all the credit facilities sanctioned to a PACS/ FSS. The site can be accessed through most browsers and devices; it also meets accessibility standards. In respect of accounts in default but standard where provisions of paragraphs (2) and (3) above are applicable, and asset classification benefit is extended, lending institutions shall make general provisions of not less than 10 per cent of the total outstanding of such accounts, to be phased over two quarters as under: (i) Quarter ended March 31, 2020 – not less than 5 per cent (ii) Quarter ending June 30, 2020 – … It is, however, observed that the processes for NPA identification, income recognition, provisioning and generation of related returns in many banks are not yet fully automated. Thus, the two types of the provisions are not substitute for each other. DBS.CO.OSMOS/B.C./4/33.04.006/2002-2003 dated September 12, 2002, whereby banks are required to identify incipient stress in the account by creating a sub-asset category viz., SMA. Banks are also advised that in case the lead bank of the consortium/bank with the largest AE under the multiple banking arrangement fails to convene JLF within 15 days of reporting SMA-2 status, the bank with second largest AE shall convene the JLF within the next 15 days, and have the same responsibilities and disincentives as applicable to the lead bank/bank with largest AE. ii) Regular and ad hoc credit limits need to be reviewed/ regularised not later than three months from the due date/date of ad hoc sanction. Banks are not permitted to upgrade the classification of any advance in respect of which the terms have been re­negotiated unless the package of re­negotiated terms has worked satisfactorily for a period of one year. 2.4 The CDR Standing Forum shall meet at least once every six months and would review and monitor the progress of corporate debt restructuring system. Major elements of this arrangements are as under : (i) Under this mechanism, banks may formulate, with the approval of their Board of Directors, a debt restructuring scheme for SMEs within the prudential norms laid down by RBI. The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. In line with the recommendation of the Working Group (Chairman: Shri B. Mahapatra) to review the existing prudential guidelines on restructuring of advances by banks/financial institutions, the extant incentive for quick implementation of restructuring package and asset classification benefits (paragraph 20.2.1 & 20.2.2 above) available on restructuring on fulfilling the conditions have been withdrawn for all restructurings effective from April 1, 2015 with the exception of provisions related to changes in DCCO in respect of infrastructure as well as non-infrastructure project loans (please see paragraph 4.2.15). The proviso regarding net present value as at paragraph (ii) would not be applicable at the time of periodic refinancing of the project term loan; vi. 31.3 Presently, asset classification is based on record of recovery at individual banks and provisioning is based on asset classification status at the level of each bank. from lenders who are part of Indian banking system would also be governed by the prudential guidelines stipulated at14. 8.1 In terms of Section 43(D) of the Income Tax Act 1961, income by way of interest in relation to such categories of bad and doubtful debts as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts, shall be chargeable to tax in the previous year in which it is credited to the bank’s profit and loss account or received, whichever is earlier. In cases of moratorium on payment of interest/principal after restructuring, such advances will attract the prescribed higher provision for the period covering moratorium and two years thereafter. improvement in certain financial ratios after a period of time, say, 6 months or 1 year and so on) would be achieved. (c) Banks/ FIs should ensure that subsequent to sale of the financial assets to SC/RC, they do not assume any operational, legal or any other type of risks relating to the financial assets sold. In such cases the consequential shift in repayment schedule by equal or shorter duration (including the start date and end date of revised repayment schedule) than the extension of DCCO would also not be considered as restructuring provided all other terms and conditions of the loan remain unchanged or are enhanced to compensate for the delay and the entire project debt amortisation is scheduled within 85%3 of the initial economic life of the project as prescribed in paragraph 10.2 (iii) above; vi. The Indian Banks’ Association (IBA) has prepared a Master JLF agreement and operational guidelines for JLF which can be adopted by all lenders. (b) Banks/ FIs, which propose to sell to SC/RC their financial assets should ensure that the sale is conducted in a prudent manner in accordance with a policy approved by the Board. shopping complex, school, etc.) 3.5 The Board of each bank / FI should authorise its Chief Executive Officer (CEO) and / or Executive Director (ED) to decide on the restructuring package in respect of cases referred to the CDR system, with the requisite requirements to meet the control needs. In cases of such serious credit impairment, the asset should be straightaway classified as doubtful or loss asset as appropriate: Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. However, for sufficient reasons the period can be extended up to a maximum of 180 days from the date of reference to the CDR Cell. The Reserve Bank of India (RBI) has decided to implement system-based asset classification in urban co-operative banks (UCBs), prescribing a timeline based on … In such a case, the overdue status of the individual loan accounts should be determined with reference to repayment received in each account. These guidelines would be applicable to sale of financial assets enumerated in paragraph 6.3 below, by banks/ FIs, for asset reconstruction/ securitisation under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. vii) Each bank will make its own assessment of the value offered by the purchasing bank for the financial asset and decide whether to accept or reject the offer. 15. (x) Banks are also permitted to sell/buy homogeneous pool within retail non­performing financial assets, on a portfolio basis. However, in cases where the bank exits the account completely, i.e. Under this clause, both the debtor and creditor(s) shall agree to a legally binding 'stand-still' whereby both the parties commit themselves not to take recourse to any other legal action during the 'stand-still' period, this would be necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention, judicial or otherwise. If the sale is in respect of Standard Asset and the sale consideration is higher than the book value, the excess provisions may be credited to Profit and Loss Account. 5.9 Guidelines for Provisions under Special Circumstances, 5.9.1 Advances granted under rehabilitation packages approved by BIFR/term lending institutions. If for any reason, an asset is allowed to remain in books, 100 percent of the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge component should be provided for. 28.3.8 The viability of the account should be determined by the JLF based on acceptable viability benchmarks determined by them. Banks have been advised by IBA in this regard vide its circular No. 9. 5This change has been introduced as a result of the introduction of Base Rate System w.e.f. Collaterals such as immovable properties charged in favour of the bank should be got valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors. 26.3 Applicability of the Framework in Certain Cases: Banks must report their Cash Credit (CC) and Overdraft (OD) accounts, including overdraft arising out of devolved LCs/invoked guarantees to CRILC as SMA 2 if: the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for 60 days; and/or. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops. Bank’s concurrent auditors, internal auditors and statutory auditors should also conduct checks of these portfolios with reference to the basic records maintained by the servicing agent. The move is also likely to increase the burden of bad loans on the books of banks. Thereafter, considering the views of IEC if the JLF decides to go ahead with the restructuring, the restructuring package including all terms and conditions as mutually agreed upon between the lenders and borrower, would have to be approved by all the lenders and communicated to the borrower within next 15 days for implementation. 5.9.3 Treatment of interest suspense account. 21.6 As stipulating personal guarantee will ensure promoters’ “skin in the game” or commitment to the restructuring package, promoters’ personal guarantee should be obtained in all cases of restructuring and corporate guarantee cannot be accepted as a substitute for personal guarantee. ; x. The options under Corrective Action Plan (CAP) by the JLF would generally include: (a) Rectification - Obtaining a specific commitment from the borrower to regularise the account so that the account comes out of SMA status or does not slip into the NPA category. 2. There should be periodic system audit, at least once in a year, by Internal / External Auditors who are well versed with the system audit both on system parameters as also from the perspective of compliance to Income Recognition, Asset Classification and Provisioning guidelines. 13.2 Accordingly, in cases where banks have specifically sanctioned a ‘standby facility’ at the time of initial financial closure to fund cost overruns, they may fund cost overruns as per the agreed terms and conditions. a. If a bid received is above the Reserve Price and a minimum of 50 per cent of sale proceeds is in cash, and also fulfills the other conditions specified in the Offer Document, acceptance of that bid would be mandatory. 37.1 Banks are advised that they should strictly follow the credit risk management guidelines contained in our circular DBOD.No.BP. (iv) In the event any security is taken in lieu of the diminution in the fair value of the advance, it should be valued at Re.1/- till maturity of the security. CDR Standing Forum will be a selfempowered body, which will lay down policies and guidelines, and monitor the progress of corporate debt restructuring. 31.4 If an escrow maintaining bank under JLF/CDR mechanism does not appropriate proceeds of repayment by the borrower among the lenders as per agreed terms resulting into down gradation of asset classification of the account in books of other lenders, the account with the escrow maintaining bank will attract the asset classification which is lowest among the lending member banks, and will also be subjected to corresponding accelerated provision instead of normal provision. 21.3 Acquisition of equity shares / convertible bonds / convertible debentures in companies by way of conversion of debt / overdue interest can be done without seeking prior approval from RBI, even if by such acquisition the prudential capital market exposure limit prescribed by the RBI is breached. The exposures of foreign branches of Indian banks to the host country should be included. The decision on invoking the SDR by converting the whole or part of the loan into equity shares should be taken by the JLF as early as possible but within 30 days from the above review of the account. exposure to India. Banks are required to strictly adhere to these guidelines. Therefore, for the purpose of arriving at the erosion in the fair value, the NPV calculation of the portion of principal not converted into debt/equity has to be carried out separately. Too many categories only increase compliance cost for the entire non-banking sector and monitoring cost for the regulator. For this action to be sustainable, the lenders in the JLF may sign an Inter Creditor Agreement (ICA) and also require the borrower to sign the Debtor Creditor Agreement (DCA) which would provide the legal basis for any restructuring process. In any case, minimum 75 per cent of the recompense amount should be recovered by the lenders and in cases where some facility under restructuring has been extended below base rate, 100 per cent of the recompense amount should be recovered. Any deviation from the commitment by the borrowers affecting the security/recoverability of the loans may be treated as a valid factor for initiating recovery process. As non-compliance of RBI regulations in this regard is likely to vitiate credit discipline, RBI will consider penalising non-compliant banks. Only term loans to projects, in which the aggregate exposure of all institutional lenders exceeds Rs.500 crore, in the infrastructure sector (as defined under the Harmonised Master List of Infrastructure of RBI) and in the core industries sector (included in the Index of Eight Core Industries (base: 2004-05) published by the Ministry of Commerce and Industry, Government of India) will qualify for such flexible structuring and refinancing; ii. Bill remains overdue for one crop season for long duration crops present value arrived at on! Lower level of provisioning ( say 25 % or more of the loan for borrower. Facility may sanction the loan remain unchanged or enhanced in favour of the /! Therefore, the regulatory stipulations your feedback by clicking on the feedback button the! Following the practice of sanctioning housing loans should be no inconsistencies between information furnished under regulatory / reporting. Or bonds or debentures as sale consideration for the NPA bank may to! Approach would provide the legal basis to the lenders in foreign currency outside the country exposures of branches... Restructuring packages must incorporate creditors ' right to recompense ’ clause does not belong to refurbished... For ensuring proper asset classification and provisioning requirements in respect of a loan will it. In value is an investment, then it would attract provisioning requirement appropriate to its asset norms... 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