Impact of Recent Changes in NBFC Corporate Debt Restructuring: A Comparative Study

Introduction

Corporate debt restructuring (CDR) is a process by which a company, facing financial distress, negotiates with its creditors to restructure its debt obligations and avoid default or bankruptcy. CDR can involve reducing the principal amount, lowering the interest rate, extending the repayment period, converting debt into equity, or a combination of these measures. CDR can benefit both the debtor and the creditors, as it can improve the cash flow and viability of the debtor and increase the recovery prospects and value of the creditors.

Non-banking financial companies (NBFCs) are financial institutions that provide various types of credit and financial services, such as loans, leases, hire-purchase, insurance, factoring, etc., but do not have a banking license or accept deposits from the public. NBFCs play a significant role in the Indian financial system, as they cater to the credit needs of the under-served segments of the economy, such as small and medium enterprises, rural and informal sectors, and low-income households. NBFCs also contribute to financial inclusion, innovation, and diversity in the financial sector.

However, NBFCs also face various challenges and risks, such as liquidity crunch, asset-liability mismatch, asset quality deterioration, regulatory arbitrage, and systemic contagion. In recent years, the NBFC sector has witnessed several episodes of stress and default, such as the IL&FS crisis in 2018, the DHFL crisis in 2019, and the COVID-19 pandemic in 2020, which have adversely affected the confidence and stability of the sector. To address these issues, the Reserve Bank of India (RBI), the central bank and the regulator of NBFCs, has introduced several measures to strengthen the prudential framework, supervision, and resolution of stressed assets of NBFCs.

One of the key measures taken by the RBI is the review and revision of the guidelines on restructuring of advances by NBFCs, which were issued in August 2023.[1] The revised guidelines aim to align the CDR framework of NBFCs with that of banks, and to ensure a consistent and transparent approach to the recognition, classification, provisioning, and resolution of stressed assets of NBFCs. The revised guidelines also incorporate the features of the prudential framework for resolution of stressed assets issued by the RBI for banks in June 2019,[2] which replaced the earlier schemes of CDR, strategic debt restructuring, and sustainable structuring of stressed assets.

Salient Features of the Revised Guidelines on Restructuring of Advances by NBFCs

The revised guidelines on restructuring of advances by NBFCs apply to all systemically important non-deposit taking NBFCs (NBFC-ND-SI) and deposit taking NBFCs (NBFC-D), which have an aggregate exposure of ₹ 50 million and above to a borrower. The revised guidelines cover both standard and non-performing assets (NPAs), and both personal and corporate exposures. The revised guidelines also cover the restructuring of loans under the COVID-19 regulatory package announced by the RBI in March 2020.[3]

The salient features of the revised guidelines on restructuring of advances by NBFCs are as follows:

• NBFCs are required to recognise incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA) as per the 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

• NBFCs are required to report credit information, including classification of an account as SMA, to the Central Repository of Information on Large Credits (CRILC), on all borrowers having aggregate exposure of ₹ 50 million and above with them. The CRILC-Main Report shall be submitted on a monthly basis. In addition, the NBFCs shall submit a weekly report of instances of default by all borrowers (with aggregate exposure of ₹ 50 million and above) by close of business on every Friday, or the preceding working day if Friday happens to be a holiday.
• NBFCs are required to have a board-approved policy for resolution of stressed assets, which shall include the eligibility criteria for restructuring, the timelines for resolution, the framework for viability assessment, the mechanism for monitoring the implementation and performance of the resolution plan, and the prudential norms for asset classification, income recognition, and provisioning. The policy shall also cover the governance and disclosure aspects of the resolution process.
• NBFCs are required to implement a resolution plan for a borrower within 180 days from the end of the review period, which is the period of 30 days from the date of first default. The resolution plan may involve any action, plan, or reorganisation, including change in ownership, restructuring, or sale of exposures, that enables the borrower to repay the debt. The resolution plan shall be deemed to be implemented only if all the following conditions are met:
  • The NBFC and the borrower agree on the terms of the resolution plan.
  • The NBFC issues a sanction letter or a statement of agreed terms and conditions to the borrower.
  • The borrower acknowledges the receipt of the sanction letter or the statement of agreed terms and conditions.
  • The NBFC makes changes in the terms and conditions of the loan agreement, if any, to reflect the resolution plan; and
  • The borrower satisfies all the other conditions, except the payment of dues, as per the resolution plan.
• NBFCs are required to assess the viability of the resolution plan based on the following parameters:
  • The resolution plan shall result in a positive net present value (NPV) of the loan, discounted at a rate equal to the original contracted interest rate or the current lending rate, whichever is lower.
  • The resolution plan shall demonstrate that the borrower can service the restructured debt, as per the terms of the resolution plan, from its cash flows.
  • The resolution plan shall ensure that the debt-equity ratio of the borrower, post-resolution, is within acceptable limits; and
  • The resolution plan shall ensure that the borrower’s capital structure and cash flows are sustainable in the long term.
• NBFCs are required to reverse the additional provisions, if any, when the account demonstrates satisfactory performance during the monitoring period, which is the period of one year from the date of commencement of the first payment of interest or principal, whichever is later, as per the resolution plan. The account shall be considered to have demonstrated satisfactory performance if it does not slip into NPA during the monitoring period, and meets the following criteria:
  • The borrower is not in default with any of the lenders as on the date of the review.
  • The borrower has paid at least 10% of the aggregate of the outstanding principal and interest as per the resolution plan; and
  • The borrower has maintained an average monthly utilisation of the sanctioned working capital limits at least at 25% of the limit during the monitoring period.
• NBFCs are required to classify the assets as per the following norms, after the implementation of the resolution plan:
  • If the account was standard before the implementation of the resolution plan, it shall be retained as standard, subject to the condition that the borrower is not in default with any of the lenders as on the date of the review.
  • If the account was NPA before the implementation of the resolution plan but is not in default with any of the lenders as on the date of the review, it shall be upgraded to standard, subject to the condition that the borrower has paid at least 10% of the aggregate of the outstanding principal and interest as per the resolution plan.
  • If the account was NPA before the implementation of the resolution plan, and is in default with any of the lenders as on the date of the review, it shall continue to be classified as NPA, and the asset classification shall be as per the ageing of the overdue amount; and
  • If the account slips into NPA after the implementation of the resolution plan, the asset classification shall be as per the ageing of the overdue amount.