Restructuring of MSME Advances
1. Definition of MSME
MSME Firm | *Qualifying Criteria |
Micro Enterprise | Investment in Plant and Machinery or Equipment does not exceed Rs.1 crore and Turnover does not exceed Rs.5 crore |
Small Enterprise | Investment in Plant and Machinery or Equipment does not exceed Rs.10 crore and Turnover does not exceed Rs.50 crore |
Medium Enterprise | Investment in Plant and Machinery or Equipment does not exceed Rs.50 crore and Turnover does not exceed Rs.250 crore |
*Composite criterion of investment and turnover shall apply for classification of an enterprise as micro, small or medium.
Credit facilities provided to MSME borrowers are categorised under Priority Sector Lending. It is observed that the Credit facilities sanctioned by banks may turn out of order or irregular due to various reasons, which may be minor or major, temporary or of a more lasting nature. Depending upon the type of irregularity, necessary measures need to be taken. In recognition of the problems being faced by the MSMEs, particularly some temporary irregularities, largely driven by mismatch in cash flow, which were caused due to delayed receivables / liquidity mismatch in case of existing units or time over run and/or cost overrun in case of new units. In order to arrest the delinquencies, bank shall initiate and undertake some proactive steps like early detection of incipient sickness and rehabilitation of potentially viable sick units so as to ensure that there is no business disruption of financially viable MSME units.
2. Stress Account:
Any account with one or more signs of stress (as mentioned herein below) shall be considered as stressed account.
Illustrative list of signs of stress for categorizing an account as SMA-0:
- Delay of 90 days or more in (a) submission of stock statement / other stipulated operating control statements or (b) credit monitoring or financial statements or (c) non-renewal of facilities based on audited financials.
- Actual sales / operating profits falling short of projections accepted for loan sanction by 40% or more; or a single event of non-cooperation / prevention from conduct of stock audits by banks; or reduction of Drawing Power (DP) by 20% or more after a stock audit; or evidence of diversion of funds for unapproved purpose; or drop in internal risk rating by 2 or more notches in a single review.
- Return of 3 or more cheques (or electronic debit instructions) issued by borrowers in 30 days on grounds of non-availability of balance/DP in the account or return of 3 or more bills / cheques discounted or sent under collection by the borrower.
- Devolvement of Deferred Payment Guarantee (DPG) instalments or Letters of Credit (LCs) or invocation of Bank Guarantees (BGs) and its non-payment within 30 days.
- Third request for extension of time either for creation or perfection of securities as against time specified in original sanction terms or for compliance with any other terms and conditions of sanction.
- Increase in frequency of overdrafts in current accounts.
- The borrower reporting stress in the business and financials.
- Promoter(s) pledging/selling their shares in the borrower company due to financial stress
3. Warning Signals:
Warning signals generally emanate from unit’s financial problems, operational problems, market related issues and consequences arising out of regulatory changes or any other reason beyond the control of the promoter. An illustrative list of warning signals is mentioned herein below:
FINANCIAL | OPERATIONAL | MARKET RELATED | OTHERS |
---|---|---|---|
Adverse key financials i.e., Declining current ratio, higher TOL/TNW, Lower Sales and operating margins etc. | Irregularities in the account i.e. Over dues in the account, devolvement of LC/BG | Adverse market reports like inability to source supplies on usual credit terms | Frequent labour problems Borrower avoiding contacts with the bank |
Erosion of TNW, High Accumulated losses | Low turnover in the account. | Complaints regarding quality of goods/service supplied | Adverse CIBIL Report |
Down gradation of External / Internal Rating by more than 2 notch | Operating the account with other bank, diversion of funds | Loss of key customers / Market share | Disorderly diversification /frequent changes in plans |
Adverse Holding levels of inventory / receivables / creditors | Adverse observation during visit i.e. lower operations in plants etc. | Increase in competition / change in Market preference | Sickness / Death of the key person. |
Non/delayed submission of financial statements | Frequent Overdrawing, insufficient drawing power. | Legal action against the unit by third party. | |
Non/delayed submission of stock statement | Overdue receivables Return of outward bills unpaid / dishonoured cheques. | Adverse changes in Government policies | |
Auditor’s adverse observations. Non- payment of statutory dues/ wages/ power bills etc. | Dissension among directors/partners/ promoters |
In order to provide a simpler and faster mechanism to address the stress in the accounts of MSMEs and to facilitate the promotion and development of MSMEs, the Ministry of Micro, Small and Medium Enterprises, Government of India, vide their Gazette Notification dated May 29, 2015 had notified a ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’. However, certain changes in the captioned framework has been carried out in consultation with the Government of India, Ministry of MSME in order to make it compatible with the existing regulatory guidelines on ‘Income Recognition, Asset Classification and provisioning pertaining to Advances’ issued to banks by RBI.
4. Definition of Restructuring
Restructuring is an act in which a lender, for economic or legal reasons relating to the borrower's financial difficulty, grants concessions to the borrower. Restructuring may involve modification of terms of the advances / securities, which would generally include, among others,
- alteration of payment period / payable amount / the amount of instalments / rate of interest;
- roll over of credit facilities;
- sanction of additional credit facility/ release of additional funds for an account in default to aid curing of default / enhancement of existing credit limits;
- compromise settlements where time for payment of settlement amount exceeds three months.
5. Reschedulement not amounting to restructuring:
Correction in inadvertent mistakes in sanction terms.
- Concessions allowed on competitive grounds.
- Reduction in Margin.
- Increasing the acceptable holding level of stock/inventory and receivables and reducing the level of trade creditors (substitution of creditor by working capital finance)
6. Brief of General Asset Classification norms for restructuring
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'.
- As a general rule, barring the one-time Restructuring as per RBI guidelines of Jan 2019 exception (including extension by RBI in same), any standard MSME account which is restructured shall be immediately downgraded as non-performing asset (NPA) i.e., ‘sub-standard’ to begin with. Such an account may be considered for upgradation to ‘standard’ only if it demonstrates *satisfactory performance during the **specified period.
‘*Satisfactory Performance’ means no payment (interest and/or principal) shall remain overdue for a period of more than 30 days. In case of cash credit / overdraft account, satisfactory performance means that the outstanding in the account shall not be more than the sanctioned limit or drawing power, whichever is lower, for a period of more than 30 days.
‘**Specified Period’ means a period of one year from the commencement of the first payment of interest or principal, whichever is later, on the credit facility with longest period of moratorium under the terms of restructuring package.
- In case of restructuring, the accounts classified as 'standard' shall be immediately downgraded as non-performing assets (NPAs), i.e., ‘sub-standard’ to begin with. The NPAs, upon restructuring, would continue to have the same asset classification as prior to restructuring.
7. Eligibility:
The provisions made in this Policy shall be applicable to MSMEs having loan limits up to Rs.25 crore, including accounts under consortium or multiple banking arrangement (MBA). However, restructuring of loan accounts with exposure of above Rs.25 crore will be in terms of guidelines given by RBI from time to time.
8. Identification of incipient stress under Framework for Revival and Rehabilitation of MSMEs:
Identification by banks or creditors: Before a loan account of a Micro, Small and Medium Enterprise turns into a Non-Performing Asset (NPA), bank identifies incipient stress in loan accounts by classifying such assets as Special Mention Accounts (SMA) as per following categories:
SMA Sub-categories | Basis for classification - Principal or interest payment or any other amount wholly or partly overdue between |
SMA-0 | 1-30 days |
SMA-1 | 31-60 days |
SMA-2 | 61-90 days |
In case of revolving credit facilities like cash credit, the SMA sub-categories will be as follows:
SMA Sub-categories | Basis for classification – Outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for a period of : |
SMA-1 | 31-60 days |
SMA-2 | 61-90 days |
On the basis of the above early warning signals, the branch maintaining the account should consider forwarding the stressed accounts with aggregate loan limits above Rs.10 lakh to the Committee as referred in Para 9.4 within five working days for a suitable corrective action plan (CAP). Forwarding the account to the Committee for CAP will be mandatory in cases of accounts reported as SMA-2
As regards accounts with aggregate loan limits up to Rs.10 lakh identified as SMA-2, the account should be mandatorily examined for CAP by the branch itself under the authority of the branch manager. Other terms and conditions, such as time limits, procedures to be followed, etc., as applicable to the cases referred to the Committee as referred in Para 9.4 should be followed by the branch manager. However, the cases, where the branch manager has decided the option of recovery under CAP instead of rectification or restructuring as mentioned in Para 11.3.1 or 11.3.2, should be referred to the Committee for their concurrence.
Identification by the Borrower Enterprise: Any MSME borrower may voluntarily initiate proceedings under this Framework, if the enterprise reasonably apprehends failure of its business or its inability or likely inability to pay debts or there is erosion in the net worth due to accumulated losses to the extent of 50% of its net worth during the previous accounting year, by making an application to the branch or directly to the Committee as referred in Para 9.4, wherever applicable. When such a request is received by lender, the account with aggregate loan limits above Rs.10.00 lakh should be referred to the Committee. The Committee should convene its meeting at the earliest but not later than five working days from the receipt of the application, to examine the account for a suitable CAP. The accounts with aggregate loan limit up to Rs.10 lakh may be dealt with by the branch manager for a suitable CAP.
9. Committees for Stressed Micro, Small & Medium Enterprises
In order to enable faster resolution of stress in an MSME account, the committees are formed as per the following arrangements:
- Each Zone will form a committee for Stressed Micro, Small and Medium Enterprises
- These Committees will be Standing Committees and will resolve the reported stress of MSME accounts of the branches falling under their jurisdiction.
- For MSME borrowers having credit facilities under a consortium of banks or Multiple Banking Arrangement (MBA), the consortium leader, or the bank having the largest exposure to the borrower under MBA, as the case may be, shall refer the case to its Committee, if the account is reported as stressed either by the borrower or any of the lenders under this Framework. This Committee will also coordinate between the different lenders.
- The Composition of the Committee at Zonal Office shall be as under:
- The Zonal Head shall be the Chairperson of the Committee;
- In-Charge CPC Commercial at the zonal office, shall be the member and convener of the Committee;
- One independent external expert with expertise in Micro, Small and Medium Enterprises related matters to be nominated by Zonal Manager.
- One representative from the concerned State Government. The representative of State Government should be General Manager, District Industries Centre of the District where committee is located or his representative. The Zones, which have committee only at the State level, it should be taken as Director Industries or his representative. In case State Government does not nominate any member, then the Zonal Manager should proceed to include an independent expert in the Committee, namely a retired executive of another bank of the rank of AGM and above.
- The quorum of the committee should be three.
- When handling accounts under consortium or MBA, senior representatives of all banks / lenders having exposure to the borrower.
- While decision of the committee will be by simple majority, the chairperson shall have the casting vote, in case of a tie. In case of accounts under consortium / MBA, lenders should sign an inter-creditor agreement (ICA) on the lines of Joint Lenders Forum (JLF) Agreement.
- All eligible stressed MSMEs shall have access to the Committee for resolving the stress in these accounts in accordance with regulations prescribed in this Framework.
- Provided that where the Committee decides that recovery is to be made as part of the CAP, the manner and method of recovery shall be in accordance with the existing policies of the bank, subject to any regulations prescribed by the Reserve Bank of India and extant statutory requirements.
- The terms of the engagement of independent external expert and retired executive of another bank shall be as under.
- Eligibility: Person having expertise in MSME related matters e.g. MSME consultant, Chartered Accountant, Retired Executive of another bank of the rank of AGM and above.
- Person engaged must have experience of at least five years in financial aspects in MSME sector and should preferably be locally available.
- The retired AGM and above must have adequate exposure in MSME and senior in designation be preferred. The independent external expert and Retired executive shall not be more than 65 years of age while on the committee.
- Tenure: One year from date of acceptance of offer. Every time fresh appointment letter has to be given. The engagement/contract is terminable with one-month notice on either side. Such appointment with provision for re-appointment once again i.e., maximum period of 1 more year.
- Review: The performance shall be reviewed by ZLCC of Zonal Head for re-appointment of person for next term.
- Remuneration: Rs.3000/- per meeting all inclusive.
- Other conditions:
- Non-disclosure clause: The appointment letter must have Non-disclosure clause. It is ensured that the person refrains from action that could damage the integrity and reputation of the bank and he/she observes strict confidentiality.
Others: The committee members engaged should not represent the Bank directly in exercising any administrative & financial powers.
10. Application to the Committee for a Corrective Action Plan (CAP)
- Any lender on identifying an MSME account as SMA-2 or suitable for consideration under the Framework or on receipt of an application from the stressed enterprise, shall forward the cases having aggregate loan limits above Rs.10 lakh to the Committee for immediate convening of meeting and deciding on a CAP. Stressed enterprises having aggregate loan limits above Rs.10 lakh can also directly file an application for CAP to the Committee or to the largest lender for onward submission under advice to all its lenders. The application forms for loans upto Rs. 10.00 lakh and above Rs.10.00 are annexed. The application, for aggregate loan limits above Rs.10.00 Lakh, should include the following:
- Latest Audited Balance Sheet of the Enterprise including its Net Worth
- Details of all liabilities of the enterprise, including the liabilities owed to the State or Central Government and unsecured creditors, if any
- Nature of stress faced by the Enterprise, and
- Suggested Remedial Actions
- Where an application is filed by a bank / lender and admitted by the Committee, the Committee shall notify the concerned enterprise about such application within five working days and require the enterprise to:
- Respond to the application or make a representation before the Committee; and
- Disclose the details of all its liabilities (of the enterprise and promoter), including the liabilities owed to the State or Central Government and unsecured creditors, if any, within fifteen working days of receipt of such notice;
Provided that if the enterprise does not respond within the above period, the Committee may proceed ex-parte.
- On receipt of information relating to the liabilities of the enterprise, the Committee may send notice to such statutory creditors as disclosed by the enterprise as it may deem fit, informing them about the application under the Framework and permit them to make a representation regarding their claims before the Committee within fifteen working days of receipt of such notice. It is mentioned here, that these informations are required for determining the total liability of the Enterprise in order to arrive at a suitable CAP and not for payments of the same by the lenders.
- Within 30 days of convening its first meeting for a specific enterprise, the Committee shall take a decision on the option to be adopted under the corrective action plan as given in subsequent paragraphs and notify the enterprise about such a decision, within five working days from the date of such decision.
- If the corrective action plan decided by the Committee envisages restructuring of the debt of the enterprise, the Committee shall conduct the detailed Techno-Economic Viability (TEV) study (also refer para 11.1) and finalize the terms of such restructuring in accordance with the extant prudential norms for restructuring, within 20 working days (for accounts having aggregate exposure up to Rs.10.00 crore) and within 30 working days (for accounts having aggregate exposure above Rs.10.00 crore and up to Rs.25 crore) and notify the enterprise about such terms, within five working days.
- Upon finalization of the terms of the corrective action plan, the implementation of that plan shall be completed by the concerned Branch / Zonal Office within 30 days (if the CAP is Rectification) and within 90 days (if the CAP is restructuring). In case recovery is considered as CAP, the recovery measures should be initiated at the earliest.
- Where an application has been admitted by the Committee in respect of an MSME, the enterprise shall continue to perform contracts essential to its survival but the Committee may impose such restrictions, as it may deem fit, for future revival of the enterprise.
- The Committee shall make suitable provisions for payment of tax or any other statutory dues in the corrective action plan and the enterprise shall take necessary steps to submit such plan to the concerned taxation or statutory authority and obtain approval of such payment plan.
11. Corrective Action Plan by the Committee
- The Committee may explore various options to resolve the stress in the account. The Committee shall not endeavor to encourage a particular resolution option and may decide the CAP as per the specific requirements and position of each case. While Techno-Economic viability of each account is to be decided by the concerned lender/s before considering restructuring as CAPs, for accounts with aggregate exposure of Rs.10 Crore and above, the Committee should conduct a detailed Techno-Economic Viability study before finalizing the CAP.
- During the period of operation of CAP, the enterprise shall be allowed to avail both secured and unsecured credit for its business operations as envisaged under the terms of CAP.
- The options under CAP by the Committee may include:
- Rectification: Obtaining a commitment, specifying actions and timelines, from the borrower to regularize the account so that the account comes out of Special Mention Account status or does not slip into the Non-Performing Asset category and the commitment should be supported with identifiable cash flows within the required time period and without involving any loss or sacrifice on the part of the existing lenders. The rectification process should primarily be borrower driven. However, the Committee may also consider providing need based additional finance to the borrower, if considered necessary, as part of the rectification process. It should however be ensured that this need based additional finance is intended only for meeting, in exceptional cases, unavoidable increased working capital requirement. In all cases of additional finance for working capital, any diversion of funds will render the account as NPA. Further, such additional finance should ordinarily be an ad-hoc facility to be repaid or regularized within a maximum period of six months. Additional finance for any other purpose, as also any roll-over of existing facilities, or funding not in compliance with the above conditions, will tantamount to restructuring. Further, repeated rectification with funding, within the space of one year, will be treated as a restructuring. No additional finance should be sanctioned under CAP, in cases where the account has been reported as fraud by any lender.
- Restructuring: Consider the possibility of restructuring the account, if it is prima facie viable and the borrower is not a willful defaulter, i.e., there is no diversion of funds, fraud or malfeasance, etc. Commitment from promoters for extending their personal guarantee along with their net worth statement supported by copies of legal titles to assets may be obtained along with a declaration that they would not undertake any transaction that would alienate assets without the permission of the Committee. Any deviation from the commitment by the borrowers affecting the security or recoverability of the loan may be treated as a valid factor for initiating recovery process. The lenders in the Committee may sign an Inter-Creditor Agreement and also require the borrower to sign the Debtor-Creditor Agreement which would provide the legal basis for any restructuring process. The IBA prepared formats and approved by our legal department for this purpose on the lines of formats used by the Corporate Debt Restructuring mechanism for Inter-Creditor Agreement and Debtor-Creditor Agreement are circulated vide H.O. circular AX1/PSRC/MSME/Cir. No.92/2016-17 dated 17.11.2016 and AX1/PSRC/MSME/Cir. No.138/2016-17 dated 16.02.2017. Further, a stand-still clause (as defined in extant guidelines on Restructuring of Advances) may be stipulated in the Debtor-Creditor Agreement to enable a smooth process of restructuring. The stand-still clause does not mean that the borrower is precluded from making payments to the lenders. The Inter-Creditor Agreement may also stipulate that both secured and unsecured creditors need to agree to the final resolution.
- Recovery: Once the first two options at (11.3.1) and (11.3.2) above are seen as not feasible, due recovery process may be resorted to. The Committee may decide the best recovery process to be followed, among the various legal and other recovery options available, with a view to optimizing the efforts and results.
The decisions agreed upon by a majority of the creditors (75% by value and 50% by number) in the Committee 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 Inter-Creditor Agreement. If the Committee decides to proceed with recovery, the minimum criteria for binding decision, if any, under any relevant laws or Acts shall be applicable.
12. Time Lines:
Detailed time-lines are given for carrying out various activities under the Framework. If the Committee is not able to decide on CAP and restructuring package due to non-availability of information on statutory dues of the borrower, the Committee may take additional time not exceeding 30 days for deciding CAP and preparing the restructuring package. However, they should not wait beyond this period and proceed with CAP.
13. Additional Finance
- If the Committee decides that the enterprise requires financial resources to restructure or revive, it may draw up a plan for provision of such finance. Any additional finance should be matched by contribution by the promoters in appropriate proportion, and this should not be less than the proportion at the time of original sanction of loans. Additional funding provided under restructuring / rectification as part of the CAP will have priority in repayment over repayment of existing debts. Therefore, installments of the additional funding which fall due for repayment will have priority over the repayment obligations of the existing debt.
- If the existing promoters are not in a position to bring in additional funds the Committee may allow the enterprise to raise secured or unsecured loans.
- Provided further, that the Committee may, with the consent of all creditors recognized, provide such loans higher priority than any existing debt.
- Any additional finance approved under the Resolution Plan {including any Resolution Plan (RP) approved by the Adjudicating Authority under IBC} may be treated as 'standard asset' during the monitoring period under the approved RP, provided the account demonstrates satisfactory performance {as defined in point 6.(i)} during the monitoring period. If the restructured asset fails to perform satisfactorily during the monitoring period or does not qualify for upgradation at the end of the monitoring period, the additional finance shall be placed in the same asset classification category as the restructured debt.
- Interest income in respect of restructured accounts classified as 'standard assets' may be recognized on accrual basis and that in respect of the restructured accounts classified as 'non-performing assets' shall be recognised on cash basis.
- In the case of additional finance in accounts where the pre-restructuring facilities were classified as NPA, the interest income shall be recognised only on cash basis except when the restructuring is accompanied by a change in ownership.
- If the Committee decides on options of either ‘Rectification’ or ‘Restructuring’, but the account fails to perform as per the agreed terms under these options, the Committee shall initiate recovery under option 11.3.3.
14. Restructuring by the Committee
- Eligibility
- Restructuring cases shall be taken up by the Committee only in respect of assets reported as Standard, Special Mention Account or Sub-Standard by one or more lenders of the Committee.
- However, the Committee may consider restructuring of the debt, where the account is doubtful with one or two lender/s but it is Standard or Sub-Standard in the books of other lenders (by value).
- Identification of eligible units for Restructuring:
Particulars
Eligible Cases
Ineligible Cases
Asset Classification
- Standard Assets
- Sub-standard Assets
- Doubtful Assets
- Loss Assets
Reason for stress / warning signals
Stress reasons beyond the control of promoters
Stress caused due to
- Willful Default
- Diversion of funds
- Fraud & Malfeasance
Financial Viability
Financially viable / potentially viable units meeting the viability criteria / parameters enumerated under Point 14.2
Not meeting the viability criteria / parameters
- Willful defaulters shall not be eligible for restructuring. However, the Committee may review the reasons for classification of the borrower as a willful defaulter and satisfy itself that the borrower is in a position to rectify the willful default. The decision to restructure such cases shall have the approval of the Board of concerned bank within the Committee who has classified the borrower as willful defaulter
- Cases of Frauds and Malfeasance remain ineligible for restructuring. However, in cases of fraud / malfeasance where the existing promoters are replaced by new promoters and the borrower company is totally delinked from such erstwhile promoters / management, banks and the Committee may take a view on restructuring of such accounts based on their viability, without prejudice to the continuance of criminal action against the erstwhile promoters / management. Further, such accounts may also be eligible for asset classification benefits available on refinancing after change in ownership, if such change in ownership is carried out as per guidelines of RBI Cir. Ref. No. RBI/2015-16/187DBR.BP.BC.No.41/21.04.048/2015-16 dated 24.09.2015 on “Prudential Norms on Change in Ownership of Borrowing Entities” and further amendments.
- Viability
- The viability of the account shall be determined by the Committee based on acceptable viability benchmarks determined by them.
- The parameters may, inter-alia, include the Debt Equity Ratio, Debt Service Coverage Ratio, Liquidity or Current Ratio, etc.
- In cases with exposure below Rs.10 crore, the viability can be ascertained by bank officials themselves. However, in case of Sunrise Industries/Greenfield projects, where a professional opinion is desirable, the sanctioning authority may engage services of empaneled/reputed agencies for ascertaining financial viability
- For exposure above Rs.10 crore, the services of empaneled/reputed agencies shall be availed for conducting viability study. (Cost of the report be borne by the customer).
- Viability Parameters and its benchmarks
Parameters
For Micro & Small Enterprises
For Medium Enterprises
Minimum average DSCR
1.25
1.50
Minimum Current Ratio to be maintained
1.17
1.25
Maximum period within which the unit should become viable
7 years from the date of restructuring
7 years from the date of restructuring
Maximum Repayment period of restructured debt
10 years from the date of implementation of restructuring
10 years from the date of implementation of restructuring
Maximum TOL/TNW
4.5:1
4:1
Minimum promoters’ contribution
20% of Banks sacrifice or 2% of restructured debt whichever is higher
20% of Banks sacrifice or 2% of restructured debt whichever is higher
Above lists are indicative and financial viability parameters will depend upon the nature of industry and will vary on case to case basis
- Note: Flexible treatment in respect of existing account who are banking with our bank for 7 years or more:
In respect of long standing borrowers who are banking with our bank for 7 years or more, no restructuring proposal shall be rejected (Other than in respect of ineligible cases as mentioned under point no.14.1.4) and a lenient view be taken on the restructuring issues.
- Conditions relating to Restructuring under the Framework
- Under this Framework, the restructuring package shall stipulate the
timeline during which certain viability milestones such as improvement in certain financial ratios after a period of 6 months may be achieved.
- The Committee shall periodically review the account for achievement / non-achievement of milestones and shall consider initiating suitable measures including recovery measures as deemed appropriate.
- Any restructuring under the Framework shall be completed within the specified time periods.
- The Committee shall optimally utilize the specified time periods so that the aggregate time limit is not breached under any mode of restructuring.
- If the Committee takes a shorter time for an activity as against the prescribed limit, then it can have the discretion to utilize the saved time for other activities provided the aggregate time limit is not breached.
- The general principle of restructuring shall be that the stakeholders bear the first loss of the enterprise rather than the lenders. In the case of a company, the Committee may consider the following options, when a loan is restructured:
- Possibility of transferring equity of the company by promoters to the lenders to compensate for their sacrifices;
- Promoters infusing more equity into their companies;
- Transfer of the promoters’ holdings to a security trustee or an escrow arrangement till turnaround of enterprise to enable a change in management control, if lenders favor it.
- In case a borrower has undertaken diversification or expansion of the activities which has resulted in the stress on the core-business of the group, a clause for sale of non-core assets or other assets may be stipulated as a condition for restructuring the account, if under the Techno-Economic Viability study, the account is likely to become viable on hiving off of non-core activities and other assets.
- For restructuring of dues in respect of listed companies, lenders may be, ab-initio, compensated for their loss or sacrifice (diminution in fair value of account in net present value terms) by way of issuance of equities of the company upfront, subject to the extant regulations and statutory requirements.
- If the lenders’ sacrifice is not fully compensated by way of issuance of equities, the right of recompense clause may be incorporated to the extent of shortfall.
- In order to distinguish the differential security interest available to secured lenders, partially secured lenders and unsecured lenders, the Committee may consider various options, such as:
- Prior agreement in the Inter-Creditor Agreement among the above classes of lenders regarding repayments;
- A structured agreement stipulating priority of secured creditors;
- Appropriation of repayment proceeds among secured, partially secured and unsecured lenders in certain pre-agreed proportion
- The Committee shall, on request by the enterprise or any creditor recognized under paragraph 10.3, provide information relating to the proceeding as requested by the enterprise or such creditor.
- Under this Framework, the restructuring package shall stipulate the
15. Review
- In case the Committee decides that recovery action is to be initiated against
- an enterprise, such enterprise may request for a review of the decision by the Committee within a period of ten working days from the date of receipt of the decision of the Committee.
- The request for review shall be on the following grounds:
- A mistake or error apparent on the face of the record; or
- Discovery of new and relevant fact or information which could not be produced before the Committee earlier despite the exercise of due diligence by the enterprise.
15.3. A review application shall be decided by the Committee within a period of thirty days from the date of filing and if as a consequence of such review, the Committee decides to pursue a fresh corrective action plan, it may do so.
16. Operational guidelines for restructuring
- Restructuring of Working Capital limit (both for Standard and NPA):
Outstanding Balance in Working Capital Limit (at the time of implementation of restructuring) shall be bifurcated as under
- Regular Limit (backed by drawing power): Same may be continued as secured portion of Working Capital limit.
Relaxation/reduction in existing margin stipulation can be allowed up to 15%, while arriving at Drawing Power for regular working capital limit.
Relaxation/Increase in holding levels of Inventory & receivables may be considered wherever necessary while arriving Drawing Power. Wherever necessary the level of acceptable inventory and receivable may be increased.
- Unsecured Portion of the outstanding balance (not backed by drawing power): Same may be carved out as WCTL (Working Capital Term loan)
- Repayment terms for WCTL would depend upon the projected / accepted cash flows and maximum period of repayment (including moratorium) shall be restricted to 10 years from the date of implementation of restructuring.
- Un-recovered interest / un-applied interest (in case of NPA): Same may be converted into FITL. Maximum 12 months’ future interest on restructured amount from the date of restructuring shall be considered under FITL limit. Promoter’s contribution as applicable may be appropriated to FITL account in reduction of the same.
- The repayment period for FITL shall be allowed maximum up to 3 years including maximum moratorium of 1 year. In respect of FITL, 80% of the repayment may be adjusted towards FITL interest and 20% towards Principal, so that the amount received in FITL may be recognized in Profit & Loss account.
- Rate of interest concession if any shall be subject to right of recompense.
- Pending decision on restructuring in stress account / NPA account, operations may be allowed in the account, subject to suitable cut back, in proportion to the profitability of the unit. This will not only ensure cash flow for regular business transactions in the account but also minimize business disruptions.
- Wherever force loans are outstanding due to devolvement of LC/BG and treated as secured, fresh LC / BGs may be allowed to be opened within the overall sanction limits to the extent of actual recovery of forced loans, resulting in partial reduction of irregular portion of such limits.
- Additional Finance: Need based additional finance by way of Working Capital can be considered on case to case basis on merits of the proposal
- Regular Limit (backed by drawing power): Same may be continued as secured portion of Working Capital limit.
- Restructuring of Term loan (both for Standard and NPA):
Outstanding Balance in Term loan (at the time of implementation of restructuring) shall be bifurcated as under
- Balance outstanding representing outstanding principal including principal over dues: Same may form part of restructured term loan.
- Maximum period of repayment (including moratorium) of Restructured term loan shall be restricted to 10 years from the date of implementation of restructuring
- Un-recovered interest / un-applied interest (in case of NPA) – Same may be converted into FITL. Maximum 12 months’ future interest on restructured amount from the date of restructuring shall be considered under FITL limit. Promoter’s contribution as applicable may be appropriated to FITL account in reduction of the same.
- The repayment period for FITL shall be allowed maximum upto 3 years, including maximum moratorium of 1 year. In respect of FITL, 80% of the repayment may be adjusted towards FITL interest and 20% towards Principal, so that the amount received in FITL may be recognized in profit & loss account.
- Rate of interest concession if any shall be subject to right of recompense.
- Pending decision on restructuring in stress account / NPA account, operations may be allowed in the current account (in the absence of CC a/c), subject to suitable cut back, in proportion to the profitability of the unit. This will not only ensure cash flow for regular business transactions in the account but also minimize business disruptions.
- Wherever force loans are outstanding due to devolvement of LC/BG and treated as secured, fresh LC / BGs may be allowed to be opened within the overall sanction limits to the extent of actual recovery of forced loans, resulting in partial reduction of irregular portion of such limits.
- Additional Finance: Need based additional finance by way of Term loan can be considered on case to case basis on merits of the proposal
Note: It has to be noted that 100% provision is required to be made on outstanding balance in FITL.
- Projects under Implementation (as per RBI Cir. Ref. No. RBI/2021-2022/104 DOR.No.STR.REC.55/21.04.048/2021-22 dated 01.10.2021)
- ‘Date of Commencement of Commercial Operations’ (DCCO)
For all projects financed by Bank, the DCCO of the project should be clearly spelt out at the time of financial closure of the project and the same should be formally documented. These should also be documented in the appraisal note by the bank during sanction of the loan.
- Deferment of DCCO
- There are occasions when the completion of projects is delayed for
legal and other extraneous reasons like delays in Government approvals etc. All these factors, which are beyond the control of the promoters, may lead to delay in project implementation and involve restructuring / reschedulement of loans by bank. Accordingly, the following asset classification norms would apply to the project loans before commencement of commercial operations.
- For this purpose, all project loans have been divided into the following two categories:
- Project Loans for infrastructure sector
- Project Loans for non-infrastructure sector
‘Project Loan’ would mean any term loan which has been extended for the purpose of setting up of an economic venture. Further, Infrastructure Sector is a sector included in the Harmonised Master List of Infrastructure sub-sectors issued by the Department of Economic Affairs, Ministry of Finance, Government of India, from time to time.
- Deferment of DCCO and consequential shift in repayment schedule for equal or shorter duration (including the start date and end date of revised repayment schedule) will not be treated as restructuring provided that:
- The revised DCCO falls within the period of two years and one year from the original DCCO stipulated at the time of financial closure for infrastructure projects and non-infrastructure projects respectively; and
- All other terms and conditions of the loan remain unchanged
As such project loans will be treated as standard assets in all respects, they will attract standard asset provision.
- Bank may restructure project loans, by way of revision of DCCO beyond the time limits quoted at Paragraph 16.3.2(iii)(a) above and retain the ‘standard’ asset classification, if the fresh DCCO is fixed within the following limits, and the account continues to be serviced as per the restructured terms:
- Infrastructure Projects involving court cases
Up to another two years (beyond the two-year period quoted at Paragraph 16.3.2(iii)(a) above, i.e., total extension of four years), in case the reason for extension of DCCO is arbitration proceedings or a court case.
- Infrastructure Projects delayed for other reasons beyond the control of promoters
Up to another one year (beyond the two-year period quoted at Paragraph 16.3.2(iii)(a) above, i.e., total extension of three years), in case the reason for extension of DCCO is beyond the control of promoters (other than court cases).
- Project Loans for Non-Infrastructure Sector (Other than Commercial Real Estate Exposures)
Up to another one year (beyond the one-year period quoted at Paragraph 16.3.2(iii)(a) above, i.e., total extension of two years).
- Infrastructure Projects involving court cases
- It is re-iterated that a loan for a project may be classified as NPA during any time before commencement of commercial operations as per record of recovery (90 days overdue). It is further re-iterated that the dispensation at Paragraph 16.3.2(iv) is subject to the condition that the application for restructuring should be received before the expiry of period mentioned at Paragraph 16.3.2(iii)(a) above and when the account is still standard as per record of recovery. The other conditions applicable would be:
- In cases where there is moratorium for payment of interest, bank shall not book income on accrual basis beyond two years and one year from the original DCCO for infrastructure and non-infrastructure projects respectively, considering the high risk involved in such restructured accounts.
- Bank shall maintain provisions on such accounts as per standard asset as long as these are classified as standard assets.
- In case of infrastructure projects, where Appointed Date (as defined in the concession agreement) is shifted due to the inability of the Concession Authority to comply with the requisite conditions, change in date of commencement of commercial operations (DCCO) need not be treated as ‘restructuring’, subject to following conditions:
- The project is an infrastructure project under public private partnership model awarded by a public authority;
- The loan disbursement is yet to begin;
- The revised date of commencement of commercial operations is documented by way of a supplementary agreement between the borrower and lender and;
- Project viability has been reassessed and sanction from appropriate authority has been obtained at the time of supplementary agreement.
- Other Issues applicable to Infrastructure project as well as non-infrastructure project
A Multiple revisions of the DCCO and consequential shift in repayment schedule for equal or shorter duration (including the start date and end date of revised repayment schedule) will be treated as a single event of restructuring provided that the revised DCCO is fixed within the respective time limits stipulated under point no. 16.3.2(iv) above, and all other terms and conditions of the loan remained unchanged.
B Any change in the repayment schedule of a project loan caused due to an increase in the project outlay on account of increase in scope and size of the project, would not be treated as restructuring if:
- The increase in scope and size of the project takes place before commencement of commercial operations of the existing project.
- The rise in cost excluding any cost-overrun in respect of the original project is 25% or more of the original outlay.
- Sanctioning authority shall re-assesses the viability of the project before approving the enhancement of scope and fixing a fresh DCCO.
- On re-rating, (if already rated) the new rating is not below the previous rating by more than one notch
Above provisions are gist of provision on project loan under implementation and detailed guidelines are available in RBI Master Circular on ‘Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated 1st October 2021 and further amendments.
- There are occasions when the completion of projects is delayed for
- ‘Date of Commencement of Commercial Operations’ (DCCO)
17. Post-restructuring Compliance
Branch Manager shall ensure that all terms and conditions of restructuring are complied with. Branch Manager/Approving authority shall take review of restructured accounts on quarterly basis and shall confirm that accounts are regular.
18. CGTMSE:
It shall be confirmed that necessary intimation is given to CGTMSE in respect of any amendment in terms of sanction & restructuring. In case of any additional finance CGTMSE cover shall be obtained as per norms.
19. Guidelines for GECL / Adhoc Line of Credit – COVID 19 by way of SLC:
The borrowal accounts (primary credit facility), which are also having facility like GECL / Adhoc Line of Credit – COVID 19 by way of SLC, are eligible for restructuring. However, such account / sanction details should be intimated to NCGTC. The GECL facility / Adhoc Line of Credit – COVID 19 by way of SLC facility itself should not be restructured under this policy.
20. Bank Sacrifice / Diminution in fair value:
Diminution on fair value needs to be computed at the time of restructuring of advance. Provision is required to be made for an amount equivalent to diminution in fair value. Norms for calculation of diminution in fair value are as under.
- For Borrower having exposure below 1 Crore: There is no need for calculation of actual diminution in fair value. Provision will be provided @ 5% of the total exposure at Head Office.
- For Borrowers having exposure above 1 Crore: NPV computation needs to be under taken for borrower having exposure above 1 Crore. Reduction in the rate of interest and / or reschedulement of the repayment of principal amount, as part of the restructuring, will result in diminution in the fair value of the advance.
- Promoter’s Contribution: Promoter will have to infuse promoter’s contribution which should be higher of a) 20% of Bank sacrifice (diminution provision) or b) 2% of restructured debts.
21. Delegation of Powers:
- Restructuring of the Standard facilities including relief and concessions can be considered by the respective sanctioning authority. However, the delegated powers for restructuring of NPA accounts falls within the lending powers of next higher sanctioning authority.
- Bonafide restructuring decision by sanctioning authority / recommending authority / Branch Head will not be questioned even in case where restructured account is subject to early mortality or becomes NPA.
- Power to initiate legal action: As per banks extant guidelines.
- Rejection of proposal for restructuring: In case the sanctioning authority on thorough scrutiny of the proposal is convinced about the financial non-viability of the restructuring proposal, Sanctioning authority shall recommend for rejection of restructuring proposal to next higher authority. The next higher authority shall independently appraise the proposal & if deemed fit may obtain report on financial viability of the proposal from an approved /reputed agency. In case the proposal is found viable, the next higher authority will direct the sanctioning authority, with justification to consider the proposal for restructuring. Before rejecting the proposal for restructuring opportunity of being heard shall be given to the borrower. Minutes of the discussion shall be kept on record which shall cover 1. Financial projections 2. Cash flows 3. Financial viability etc., Reasons for rejection of restructuring shall be communicated to the borrower and same shall be held on record.
- Review: In case, the committee decides that recovery action is to be initiated against an enterprise, such enterprise may request for a review of the decision by the committee within a period of 10 working days from the date of the receipt of the decision of the committee. A review application shall be decided by the committee within a period of 30 days from the date of filing and if as a consequence of such review, the committee decides to pursue a fresh corrective action plan, it may do so.
- Appeal by the borrower in case of rejection by the higher authority: In cases where the higher authority also rejects restructuring proposal and if the borrower makes a request/appeal for reconsideration of the decision, such request/appeal shall be forwarded to MSME Department, Head Office, which shall take final decision on restructuring of the account.
22. Rate of Interest, Relief and Concession:
- Interest on Working Capital Limit: As per Risk Based Pricing
- Interest on Term Loan: As per Risk Based Pricing
- Interest on FITL: Interest shall be charged on Funded Interest Term Loan at the rate of 1 Year MCLR and such Funded Interest along with interest, should be recovered within 36 months’ period.
- Interest on WCTL: Interest on Working Capital Term Loan shall be charged at the rate of 1 Year MCLR + 1.00%.
These rates are applicable to Standard and NPA accounts from the date of implementation of restructuring.
The above mentioned relief (RoI on WCTL & FITL) shall be treated as regular rates to be charged on restructured amount and same can be granted by same authority who sanctions restructuring.
Right of Recompense:
The Right of Recompense shall be exercised in all such cases and a condition to that effect shall be stipulated in all Restructure Sanctions.
For regular portion of existing CC / existing term loan, applicable interest rate as per bank’s policy shall be charged. Other concessions, if any, are to be referred to respective sanctioning authority.
- Processing Fee for restructured accounts:
- Applicable processing charges shall be recovered for the additional facilities (if considered), along with
- Amendment charges
- Up to Rs.5 Lakh: NIL
- Above Rs.5 Lakh: 0.10% of restructured facilities + GST
- If there is an increase in exposure: Applicable processing fees for additional facilities, as per extant guidelines
Note: Processing / Documentation / Inspection charges shall not be applied on WCTL and FITL accounts.