RBI cracks whip on Joint Lenders’ Forum, by Abhirup Ghosh

Background

The Reserve Bank of India, on 5th March, 2017, came out with a notification[1] (Notification) to tweak the norms for constitution and operation of Joint Lender’s Forum (JLF) which was originally introduced in February, 2014.

To do recap, the original framework requires formation of joint lenders’ forum upon an account becoming SMA-2 to devise a corrective action plan (CAP) to revive it. Under the CAP, the lenders have three options – first, rectification of the account without changing any terms of the financial arrangement, second, restructuring of the account which involves change in the terms and conditions of the financial arrangement and lastly, if the other two fails, then the lenders may decide to initiate recovery proceedings against the borrower.

This notification is connected with the ordinance[2] passed by the Government of India to insert two sections in the Banking (Regulation) Act, 1949. The ordinance has inserted sections 35AA and 35AB, which provides entrusts the central government with the power of authorising the RBI to direct banking companies to resolve specific stressed assets by initiating insolvency resolution process.

Here in this write up we intend to analyse the implications of the notification.

Meaning and discussion of the Notification

Relaxation in approval requirements

The Notification eases down approval requirements under the framework for JLF. The original framework required approval of 75% of creditors in value and 60% of creditors in number, for any approval. However, this has now been brought down to 60% in value of 50% in number. The Notification also states that once the approval is obtained, the decision will be binding on others, however, the remaining lenders will have an exit opportunity.

The intention is quite simple, earlier, if any of the lenders had 25% exposure on a borrower, it had the right to call the shots, which meant that the control lenders had the option of delaying the CAP until the terms and conditions were adjusted to its favour. But relaxing the approval requirements will ensure seamless approval and implementation of the CAP.

This is not the first time that the Government has realised that relaxed approval conditions will only increase ease of operations. Initially, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (SARFAESI Act) also required approval from 75% of creditors in value and 60% of creditors in number for passing a motion, but that was reduced to 60% in value and 50% in number and now this Notification.

However, the recently passed law, Insolvency and Bankruptcy Code, 2016 still requires approval of 75% of lenders in value for passing any resolution. Here it is important to note that while the change in the JLF framework has been brought in recently, but the amendments to the SARFAESI Act were made much before the Bankruptcy Code was passed. There is absolutely no reason that would explain why the Government overlooked its past experience while dealing with consortium of lenders. The current requirements under the Bankruptcy Code will only delay the implementation of the corrective actions for reviving a borrower in distress under the Bankruptcy Code.

Other changes

In addition to the above the RBI has also laid down the following conditions:

  • The stand of the participating banks while voting on the final proposal before the JLF shall be unambiguous and unconditional;
  • Any bank which does not support the majority decision on the CAP may exit subject to substitution within the stipulated time line, failing which it shall abide the decision of the JLF;
  • The bank shall implement the JLF decision without any additional conditionality; and
  • The Boards shall empower their executives to implement the JLF decision without requiring further approval from the Board.

Conclusion

The Notification is brought in at a time when, despite several resolution mechanisms available, the banks were facing difficulties in turning around the distressed accounts, only because of dilly-dallying by the banks. This Notification is a very aggressive move to punish the banks whose irregularities are adding to the woes of poor asset quality in the country.

In fact, henceforth, any non-adherence to the instructions and timelines specified under the Framework shall attract monetary penalties on the concerned banks under the provisions of the Banking Regulation Act 1949.

[1] https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10957&Mode=0

[2] http://pib.nic.in/newsite/PrintRelease.aspx?relid=161588

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