RBI Master Circular on prudential norms for income recognition, asset classification and provisioning for the advances

  • On April 01, 2022, the Reserve Bank of India (RBI) issued a Master Circular for income recognition, asset classification and provisioning for the advances portfolio of the banks, so as to move towards greater consistency and transparency in the published accounts (Master Circular). By way of the said Master Circular, banks have been urged to ensure that while granting loans and advances, realistic repayment schedules are fixed on the basis of cash flows with borrowers. This would facilitate prompt repayment by the borrowers and thus improve the record of recovery in advances and, consequently, maintain consistency of the cash flow in the economy.
  • The Master Circular has been primarily divided into three parts:
    1. PART-A includes clauses pertaining to income recognition, asset classification, provisioning norms, writing-off of NPAs and NPA management.
    2. PART-B includes clauses pertaining to framework for resolution of stressed assets and prudential norms applicable to restructuring.
    3. PART-C includes clauses pertaining to wilful defaulters and non-cooperative borrowers, bank loans for financing promoters' contribution, credit risk management, etc.
  • While the Master Circular provides a detailed structure for provisioning for the advances portfolio of banks, a brief summary of the same is as under:
    • In cases of continuing Corporate Insolvency Resolution Process (CIRP) of borrower, where the approved Resolution Plan has been submitted for approval of Adjudicating Authority, the Master Circular allows for freezing the provisions held by bank for a period of six months from the submission of Resolution Plan or ninety days from approval of Resolution Plan by Adjudicating Authority, whichever occurs earlier.
    • The Master Circular provides for classification of any 'additional finance' and 'interim finance' extended by the lender as 'standard asset', subject to its satisfactory performance. However, in case of failure to perform satisfactorily, the asset is re-classified as restructured debt.
    • In the event of transfer of ownership of Corporate Debtor to a successful resolution applicant, the existing credit facilities of borrower may either be continued or upgraded to 'standard asset' under the given framework. However, the same shall only be done by the lender on fulfilment of following conditions:
      • The new acquirer of the Corporate Debtor is eligible to be a resolution applicant and is not barred under Section 29A of the IBC.
      • The new promoter does not belong to the existing promoter group of the Corporate Debtor.
      • The acquirer must hold at least 26% of the paid-up equity capital, voting rights and should the largest shareholder of the Corporate Debtor.
      • The acquirer shall also exercise 'control' over the Corporate Debtor within the meaning of Section 2(27) of the Companies Act, 2013.
  • The Master Circular also clarifies that all the outstanding loans/credit facilities of the borrowing entity need to demonstrate satisfactory performance during the monitoring period1. If the account fails to perform satisfactorily at any point of time during the monitoring period, it shall trigger a Fresh Review Period2.
  • Finally, in respect of framework for resolution of stressed asset dealt under Part B1 of the Master Circular, it is expected that lenders put in place the board approved policies for resolution of stressed assets, along with timelines for resolution. This enables the lenders to take prima facie-review of the borrower's account and initiate the process of implementing a Resolution Plan even before a default. The period of thirty-days for review period is to decide upon the resolution strategy and other incidental strategies including initiation of legal proceedings for insolvency and recovery.
  • Amendment to Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2016

  • In exercise of the powers conferred by Clause (t) of sub-Section (1) of Section 196 read with Section 240 of the IBC, on April 05, 2022, the Insolvency and Bankruptcy Board of India (IBBI) notified certain amendments to the IBBI (Voluntary Liquidation Process) Regulations, 2017 (Principal Regulations).
  • In terms of Regulation 5 sub-Regulation (2) of the Principal Regulation, the insolvency professional has to intimate the IBBI within three days of his appointment as Liquidator. The instant amendment extends the existing period of three days to seven days.
  • The amendment also encapsulates substitution of the word 'Corporate Debtor' with 'Corporate Person' under Clause (r) of sub-Regulation (2) to Regulation 10 of the Principal Regulations.
  • Further, in sub-Regulation (1) Clause (c) of Regulation 2 of the Principal Regulations, the reference to Principal Regulation 3(4) has been replaced with Principal Regulation 3(3). Therefore, pursuant to the amendment, the liquidation proceedings in respect of a Corporate Person shall be deemed to have commenced from the date of passing of the resolution either by a special majority of the partners or contributories to liquidate the Corporate Debtor, or by the partners or contributories, as the case may be, requiring the corporate person to be liquidated as a result of expiry of the period of its duration.
  • Regulation 30(2) of the Principal Regulations directs the Liquidator to prepare the list of stakeholders within forty-five days from the last date for receipt of claims. By way of the present amendment, a proviso to the said Regulation has been inserted which provides that in the event of non-receipt of claim from any creditor till the last date of receipt of claim, the Liquidator shall prepare list of stakeholders within fifteen days of last date of receipt of claim.
  • The time period of six-months as provided under Regulation 35 of the Principal Regulation for distribution of the proceeds realized has now been reduced to thirty days.
  • Further, to reduce the time involved in conclusion of a voluntary liquidation process, the amendment substitutes the existing Regulation 37(1) of the Principal Regulation with the following:
  • "(1) The liquidator shall endeavour to complete the liquidation process of the corporate person and submit the Final Report under Regulation 38 within: -

    (a) Two hundred and seventy days from the liquidation commencement date where the creditors have approved the resolution under clause (c) of sub-Section (3) of Section 59 or clause (c) of sub-Regulation (1) of Regulation 3, and

    (b) Ninety days from the liquidation commencement date in all other cases."

  • In addition to the above amendments, the existing FORM-H as provided under the Principal Regulation has been renamed as FORM-I. Further, a new FORM-H – 'Compliance Certificate' has been introduced. The newly introduced Form-H is similar to the Form-H that is to be filed by a Resolution Professional along with an application under Section 30(4) of IBC, which in effect is a snapshot of compliance of the mandatory pre-requisites under the liquidation process.

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