Ameya KhandgePartner

Okram SinghaCounsel

While the outbreak of Omicron seemed to dampen the spirits towards the end of the last quarter, there was considerable regulatory activity during this period. The Reserve Bank of India (RBI) tightened the norms on the identification of non-performing assets (NPAs) and issued necessary clarifications on the mechanism to replace the LIBOR regime in the context of foreign currency external commercial borrowings and trade credits. The judiciary also pronounced several relevant rulings in the insolvency space during this period.

Key Developments

• Master Circular - Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances

  The RBI issued the Master Circular - Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances on 1 October 2021 along with notifications clarifying certain provisions thereunder on 12 November 2021 (IRAC Master Circular). Some of the key highlights of the IRAC Master Circular are:

  • The introduction of stricter requirements to specify payment terms, including payment dates, in loan agreements including obligation to apprise the borrower at the time of sanction of the loan and also at the time of subsequent changes, to avoid any ambiguity.
  • A stricter timeline for classification of NPAs in case of interest payment. The calculation of 90 days for determination of NPA status of loan accounts will now be done from the actual interest payment due date instead of from the end of the relevant quarter, as was the case earlier.
  • The loan accounts classified as NPAs may be upgraded as 'standard' assets only if the entire arrears of interest and principal are paid. While banks were already bound by this requirement, the other lending institutions are now also required to be compliant. This is aimed at removing the prevalent practice of lending institutions sometimes accepting partial payouts for such upgradation.
  • The special mention account (SMA) classification of accounts is applicable to all loans, including retail loans, irrespective of size of exposure of the lending institution. Given the volume of retail loans, lending institutions having a retail loan portfolio will now have to devise better internal monitoring mechanisms which may have a cost impact in the short run.

• External Commercial Borrowings and Trade Credits Policy – Changes due to LIBOR transition

  In light of the imminent discontinuance of LIBOR as the benchmark rate, the RBI made certain amendments to the all-in-cost benchmark and ceiling for foreign currency External Commercial Borrowings (ECBs)/ Trade Credits (TCs) under the Master Direction - External Commercial Borrowings, Trade Credits and Structured Obligations on 8 December 2021. The key changes are:

  • Going forward, the benchmark rate must refer to any widely accepted interbank rate or alternative reference rate of 6-month tenor;
  • An increase in the all-in-cost ceiling for the new foreign currency ECBs and TCs from 50 bps to 500 bps and 300 bps, respectively, over the benchmark rates.

  However, these changes are not applicable to Indian Rupee-denominated ECBs or TCs. The introduction of this replacement rate brings in much-needed clarity on the LIBOR phase-out process for ECBs and TCs.

• Prompt Corrective Action Framework for Scheduled Commercial Banks and Non-Banking Financial Companies

  The Prompt Corrective Action for Scheduled Commercial Banks issued by the RBI on 2 November 2021 (PCA Banks) for revising the existing framework has become effective from 1 January 2022. The primary objective of the PCA Banks framework is to enable timely intervention and implementation of remedial measures. Along the same lines, the Prompt Corrective Action for Scheduled Commercial Banks of NBFCs was issued on 14 December 2021 (PCA NBFC). PCA NBFC framework allows for a mechanism of intervention for recognising the NPAs of a troubled NBFC in order to protect the market’s health. This seems critical in light of the recent spate of faltering NBFCs. PCA NBFC framework will be effective from 1 October 2022 and will be assessed based on the financial position of the NBFCs on 31 March 2022.

• Recent developments under the Insolvency and Bankruptcy Code, 2016

  In Ebix Singapore Private Limited v Committee of Creditors of Educomp Solutions Limited & Anr., the Supreme Court held that a resolution plan approved by the committee of creditors cannot be allowed to be withdrawn or modified by the successful resolution applicant by approaching the adjudicating authority. This will discourage market players from participating in a resolution process if they are uncertain of their ability to fulfil their obligations under a proposed resolution plan.

  The National Company Law Tribunal, Jaipur Bench, held in Alturas Trading Corp. v VRMX Concrete India Pvt. Ltd., that a government company falls under the definition of 'company' under the Companies Act, 2013 and therefore, is not immune to the insolvency resolution process under the IBC. This gives creditors of government companies a much-needed recourse for resolution of their bad debt exposures to such companies.

The ensuing quarter starts on the heels of another Covid-19 outbreak in India. Businesses are likely to aim towards making the final push in the last quarter to regain any momentum that was lost. It will be interesting to see how the RBI moves forward and if it waits for the financial year to end before introducing further regulatory changes.

On the upcoming budget front, NBFCs have been raising concerns about the lack of financing options for them. Consequently, many NBFCs are looking forward to reforms by way of introduction of refinancing schemes along the same lines as available to housing finance companies. They will also be looking forward to measures to bring them at par with banks for tax deducted on source for interest payments. It will be interesting to see whether the government considers these changes.

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