Stop crazy lending, lazy lending, write Rajan and Acharya

– Vinod Kothari

vinod@vinodkothari.com

Raghuram Rajan and Viral Acharya, both having got the first-hand experience of holding the reins at the RBI, have prescribed several urgent measures to restore the health of the banking system. Neither do we have the fiscal space to support the banking system with fresh doses of capital, nor can we afford any more spikes in the almost top-of-the-world GNPA ratios. The duo, who have written several articles in the past, wrote this piece[1] on 21st Sept. 2020.

In a strongly worded write-up, the two celebrated academics of the financial world, have clearly taken it out on the bureaucracy and the government.  The authors say while advocacy for comprehensive banking sector reforms have been done in the past, the onus of not making it happen is clearly on the government itself: “There are strong interests against change, which is why many would-be reformers are cynical, and either have given up, or recommend revolutionary change that has little chance of being implemented. We are more optimistic that a middle road is achievable, given that the greatest stumbling block has been the government, the bureaucracy, and the interests within it. With the enormous strains on government finances from the slow growth pre-COVID and the subsequent effects of the pandemic, the country has to transform the banking

sector from being a drain on government resources and an impediment to growth to becoming an engine of growth. This will not happen through incremental reforms. The status quo is fiscally untenable.”

The authors are unsparing when they clearly say the Department of Financial Services should be scrapped. The authors recommend that “Winding down Department of Financial Services in the Ministry of Finance is essential, both as an affirmative signal of the intent to grant bank boards and management independence and as a commitment not to engage in “mission creep” when compulsions arise to use banks for serving costly social or political objectives.” They also say that despite clear recommendations of the Nayak Committee in 2014[2], nothing has changed in terms of autonomy of the banks in the country. The authors may be resonating the bitterness of many senior bankers when they say: “Parliamentarians of all parties are not immune to the lure of public sector banks – the banks are often asked to arrange the logistics for their fact-finding committee meetings in enjoyable locales across the country. And Finance Ministry bureaucrats are reluctant to let go of the power that allows a young joint secretary to order the chairpersons of national banks around”

No more crazy lending, lazy lending

Banks in India cannot afford to have the false sense of having safe assets by “lazy lending”. The term, coined by Dr Rakesh Mohan, the-then Deputy Governor of RBI[3], refers to bankers choosing to invest in risk-free government bonds, even when the opportunity cost of capital for them is much higher. At the same time, banks also cannot afford to do “crazy lending”, by lending to riskiest of borrowers as more credit-worthy borrowers choose to rely on capital markets, and thereby, pile up non-performing loans on their balance sheets.

Indian banks, particularly PSUs, have managed to pile up bad loans on their balance sheet. There were sizeable NPAs even before the Covid. Six months of covid-moratorium meant virtually no cashflows, and as the servicing burden on the borrowers has increased over these months, most banks will be forced to use the loan restructuring option following covid-disruption[4]. The contention that the covid-disruption will become the alibi to restructure loans that were even otherwise fragile does not require much evidencing.

Source: Handbook of statistics on the Indian Economy, 2019-20[5]

Rajan and Acharya refer to the well-known ever-greening problem of Indian banking – with the bankers supporting bad loans by sequential doses of further lending, and the promoters continuously stripping the assets out and diverting profits and cashflows, leaving the borrower to be a “zombie”. Authors say that banks, by keeping the zombies alive, do a double damage to the system – on one hand, the bankers continue to focus on bad loan management and therefore, spend less time and resources to creating healthy loans, and on the other, the presence of half-dead firms discourages healthy industries as well.

While banks over the world have converged to IFRS, which provides for an “expected loss” model, the Indian banking system is still driven by the regulatory requirement of provisioning, in form of the so-called IRAC (Income recognition and asset classification) norms. However, periodically, the RBI comes with schemes whereby banks can avoid classifying a loan as an NPA.

“With forbearance in the form of delayed provisioning, not only does the firm’s condition deteriorate, but the banker has to take a large loss when he eventually restructures the loan. So instead the banker holds off, under-provisioning mounts, and what was meant to be temporary regulatory forbearance inevitably creates banker demand for more, near-permanent forbearance”, say the authors. The authors say that fear-struck bankers are more comfortable in letting the NCLT process take over the bankers’ resolution, since, in that case, the decisions are made by the NCLT-appointed professional, and not by the bank, who may thus get sheltered by the proverbial 3 Cs that haunt bankers.

Arguing for the need to revisit sec. 29A of the Insolvency Code, Rajan and Acharya say that the provision are needed at the time when the defaulting borrower was to be prevented from buying bank his own assets and potentially scaring other buyers. But in the present scenario of pandemic stress, this will also prevent the promoter whose business faltered for no fault of his. The authors also reflect the reality when the say the NCLT “already has a large backlog of cases, some of which have dragged on for much longer than the targeted duration for bankruptcy. It cannot possibly handle the volume of distress that will have to be dealt with post-pandemic without a significant expansion of the number of its judges and benches. Unfortunately, the quantum of trained personnel that is needed may simply not exist.”

The authors also advocate the retention of the debtors’ control, at least in the post-pandemic restructurings. Notably, the creditors’ in control model that India has adopted, is inspired by the UK approach, whereas the USA has a debtor-in-control approach.

The authors are also in favour of a larger predominance of out-of-court resolutions: “Ideally though, there should be greater use of out-of-court restructuring and the NCLT should be used to stamp the out-of-court restructuring with legal finality. Only if an out-of-court restructuring could not be agreed upon between the creditors and the borrower would the firm be forced into a bankruptcy auction. The shadow of bankruptcy would then improve the ease and quality of the negotiation out of bankruptcy, as it does in other countries. But this requires bankers, especially public sector bankers, to be able to negotiate”

Creation of “bad bank”

The bad bank experience has had a limited success in India. IDBI created SASF in 2004. However, neither did it help the bad loans, nor IDBI. Subsequently, India has worked on a private sector model of so-called “bad banks”, in form of the ARCs. However, the transfer of loans to ARCs may mostly take the form of security receipts, which is paper-for-paper. It is only in the recent past that banks have insisted on all-cash loan transfers.

Hence, authors argue that what may be more effective is a transparent market for bad loans. Notably, the draft Directions for Sale of Loans, issued by the RBI for public comments on 08th June, 2020[6], provided, among other things, an auction-based disposal of bad loans. There is apparently also a discussion on permitting foreign investors to invest in bad loans directly.

Additionally, the authors also suggest the creation of a “public credit registry”. Currently, there are multiple registries in India working with significant overlaps and lack of cohesiveness. CERSAI, NeSL, and CRILC are such registries, each intended to serve different purposes. However, it will not be a high hanging fruit to combine them into a loan registry, where the information about a loan, its collateral, performance, etc. are all pooled into a single database. Authors say that KAMCO, Korea, after completion of its asset management task, is now evolving itself into a loan registry.

Authors suggest that selling of loans will bring transparency and price discovery. Currently, RBI’s regulatory framework has been restraining banks from selling loans, mainly on the concerns of originate-to-hold model.

The authors contend that if a transparent pricing could emerge by creating a secondary market, a bad bank could emerge by the market mechanism itself. These market-based bad banks can have sectoral focus, rather than a generic pool of NPAs as is currently the case. The authors also cite global examples of warehousing bad loans to find a more opportune time for disposing them.

Move from asset-based lending to cashflow-based lending

Lending can be, as it traditionally has been, focused on the on-balance sheet assets and collateral, or may be focused on the cashflows of the business. In case of asset-based lending, the lender focuses on balance sheet ratios such as leverage and loan-to-value. In cash-flow based lending approach, the lender focuses on liquidity and debt-servicing ability.

An RBI Expert Group led by Shri U K Sinha recommended a cash-flow based lending structure for MSME funding[7].

Recently, large Indian banks announced plans to move to cashflow-based lending, such as SBI. SBI Chairman Rajnish Kumar stated “SBI will switch to a cash flow-based lending model beginning April 2020 from a mechanism where loans are given against assets”[8].

The authors have recommended a transition from asset based lending to (also) cash flow based lending. The authors mention that “Banks could rely more on loan covenants for large borrowers, tied to liquidity and leverage ratios (instead of lending purely against assets). This would set up “trip wire” points for enhancing loan collateralization, rather than requiring it from the beginning; in case of small borrowers, reliance on GST invoices and utility payment bills, among other cashflow information, can facilitate such a transition.”

Group-lending limits

The authors talk about the problem relating to certain promoters running large conglomerates while sitting on thin slices of equity. Due to this the following problems are highlighted by the authors, namely, a) this creates systemic risk in the banking system, b) leads to concentration of corporate power and a complex maze of related party transactions between financial and real subsidiaries of the group that are often the veil behind which frauds are perpetrated.

The authors recommend that highly indebted groups should not be allowed to expand their footprint significantly by using bank money to bid on new projects. Group lending norms should be enforced as the economy recovers. Further, the authors state that aggregate permissible system exposures should be linked to the aggregate debt equity ratio for the group (including non-bank borrowing and foreign borrowing). Over-leveraging by specific promoters or groups needs to be limited if the Indian banking system’s health is to be restored.

[1] https://faculty.chicagobooth.edu/-/media/faculty/raghuram-rajan/research/papers/paper-on-banking-sector-reforms-rr-va-final.pdf

[2] https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/BCF090514FR.pdf

[3] https://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=310

[4] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11941&Mode=0

Our write up & FAQs on the framework may be viewed here: http://vinodkothari.com/2020/08/resolution-framework-for-covid-19-related-stress-resfracors/

http://vinodkothari.com/2020/09/faqs-on-resolution-of-loan-accounts-under-covid-19-stress/

[5] https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/58TB5A66F26A72F460687373406F1D51C43.PDF

[6] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=957

[7] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=924

[8] https://www.financialexpress.com/industry/banking-finance/sbi-to-shift-to-cash-flow-based-lending-by-april-2020/1797095/

RBI refines the role of the Compliance-Man of a Bank

Notifies new provisions relating to Compliance Functions in Banks and lays down Role of CCO.

By:

Shaivi Bhamaria | Associate

Aanchal Kaur Nagpal | Executive

Introduction

The recent debacles in banking/shadow banking sector have led to regulatory concerns, which are reflected in recent moves of the RBI. While development of a robust “compliance culture” has always been a point of emphasis, RBI in its Discussion Paper on “Governance in Commercial Banks in India’[1] [‘Governance Paper’] dated 11th June 2020 has dealt extensively with the essentials of compliance function in banks.  The Governance Paper, while referring to extant norms pertaining to the compliance function in banks, viz. RBI circulars on compliance function issued in 2007[2] [‘2007 circular’] and 2015[3] [‘2015 circular’], placed certain improvement points.

In furtherance of the above, RBI has come up with a circular on ‘Compliance functions in banks and Role of Chief Compliance Officer’ [‘2020 Circular’] dated 11th September, 2020[4], these new guidelines are supplementary to the 2007 and 2015 circulars and have to be read in conformity with the same. However, in case of or any common areas of guidance, the new circular must be followed.  Along with defining the role of the Chief Compliance Officer [‘CCO’], they also introduce additional provisions to be included in the compliance policy of the Bank in an effort to broaden and streamline the processes used in the compliance function.

Generally, in compliance function is seen as being limited to laying down statutory norms, however, the importance of an effective compliance function is not unknown. The same becomes all-the-more paramount in case of banks considering the critical role they play in public interest and in the economy at large. For a robust compliance system in Banks, an independent and efficient compliance function becomes almost indispensable. The effectiveness of such a compliance function is directly attributable to the CCO of the Bank.

Need for the circular

The compliance function in banks is monitored by guidelines specified by the 2007 and 2015 circular. These guidelines are consistent with the report issued by the Basel Committee on Banking Supervision (BCBS Report)[5] in April, 2005.

While these guidelines specify a number of functions to be performed by the CCO, no specific instructions for his appointment have been specified. This led to banks following varied practices according to their own tailor-made standards thus defeating the entire purpose of a CCO. Owing to this, RBI has vide the 2020 circular issued guidelines on the role of a CCO, in order to bring uniformity and to do justice to the appointment of a CCO in a bank.

Background of CCOs

The designation of a CCO was first introduced by RBI in August, 1992 in accordance with the recommendations of the Ghosh Committee on Frauds and Malpractices in Banks. After almost 15 years, RBI introduced elaborate guidelines on compliance function and compliance officer in the form of the 2007 circular which was in line with the BCBS report.

According to the BCBS report:

‘Each bank should have an executive or senior staff member with overall responsibility for co-ordinating the identification and management of the bank’s compliance risk and for supervising the activities of other compliance function staff. This paper uses the title “head of compliance” to describe this position’.

Who is a CCO and how is he different from other compliance officials?

The requirement of an individual overseeing regulatory compliance is not unique to the banking sector. There are various other laws that the provide for the appointment of a compliance officer. However, there is a significant difference in the role which a CCO is expected to play. The domain of CCO is not limited to any particular law or its ancillaries, rather, it is all pervasive. He is not only responsible for heading the compliance function, but also overseeing the entire compliance risk[6] in banks.

Role of a CCO in a Bank:

The predominant role of a CCO is to head the compliance function in a Bank. The 2007 circular lays down the following mandate of a CCO:

  1. overall responsibility for coordinating the identification and management of the bank’s compliance risk and supervising the activities of other compliance function staff.
  2. assisting the top management in managing effectively the compliance risks faced by the bank.
  3. nodal point of contact between the bank and the RBI
  4. approving compliance manuals for various functions in a bank
  5. report findings of investigation of various departments of the bank such as at frequent intervals,
  6. participate in the quarterly informal discussions held with RBI.
  7. putting up a monthly report on the position of compliance risk to the senior management/CEO.
  8. the audit function should keep the Head of compliance informed of audit findings related to compliance.

The 2020 circular adds additional the following responsibilities on the CCO:

  1. Design and maintenance of compliance framework,
  2. Training on regulatory and conduct risks,
  3. Effective communication of compliance expectations

Selection and Appointment of CCO:

The 2007 circular is ambiguous on the qualifications, roles and responsibilities of the CCO. In certain places the CCO was referred to as the Chief Compliance officer and some places where the words compliance officer is used. This led to difficulty in the interpretation of aspects revolving around a CCO. However, the new circular gives a clear picture of the expectation of RBI from banks in respect of a CCO. The same has been listed below:

Basis 2020 circular 2007 circular
Tenure Minimum fixed tenure of not less than 3 years The Compliance Officer should be appointed for a fixed tenure
Eligibility Criteria for appointment as CCO The CCO should be the senior executive of the bank, preferably in the rank of a General Manager or an equivalent position (not below two levels from the CEO). The compliance department should have an executive or senior staff member of the cadre not less than in the rank of DGM or equivalent designated as Group Compliance Officer or Head of Compliance.
Age 55 years No provision
Experience Overall experience of at least 15 years in the banking or financial services, out of which minimum 5 years shall be in the Audit / Finance / Compliance / Legal / Risk Management functions. No provision

 

Skills Good understanding of industry and risk management, knowledge of regulations, legal framework and sensitivity to supervisors’ expectations No provision
Stature The CCO shall have the ability to independently exercise judgement. He should have the freedom and sufficient authority to interact with regulators/supervisors directly and ensure compliance No provision
Additional condition No vigilance case or adverse observation from RBI, shall be pending against the candidate identified for appointment as the CCO. No provision
Selection* 1.      A well-defined selection process to be established

2.      The Board must be required to constitute a selection committee consisting of senior executives

3.      The CCO shall be appointed based on the recommendations of the selection committee.

4.      The selection committee must recommend the names of candidates suitable for the post as per the rank in order of merit.

5.      Board to take final decision in the appointment of the CCO.

No provision
Review of performance appraisal The performance appraisal of the CCO should be reviewed by the Board/ACB No provision
Reporting lines The CCO will have direct reporting lines to the following:

1.      MD & CEO and/or

2.      Board or Audit Committee

No provision
Additional reporting In case the CCO reports to the MD & CEO, the Audit Committee of the Board is required to meet the CCO quarterly on one-to-one basis, without the presence of the senior management including MD & CEO. No provision
Reporting to RBI 1.      Prior intimation is to be given to the RBI in case of appointment, premature transfer/removal of the CCO.

2.      A detailed profile of the candidate along with the fit and proper certification by the MD & CEO of the bank to be submitted along with the intimation, confirming that the person meets the supervisory requirements, and detailed rationale for changes.

No provision
Prohibitions on the CCO 1.      Prohibition on having reporting relationship with business verticals

2.      Prohibition on giving business targets to CCO

3.      Prohibition to become a member of any committee which brings the role of a CCO in conflict with responsibility as member of the committee. Further, the CCO cannot be a member of any committee dealing with purchases / sanctions. In case the CCO is member of such committees, he may play only an advisory role.

No provision

*The Governance paper had proposed that the Risk Management Committee of the Board will be responsible for selection, oversight of performance including performance appraisals and dismissal of a CCO. Further, any premature removal of the CCO will require with prior board approval. [Para 9(6)] However, the 2020 circular goes one step further by requiring a selection committee for selection of a CCO.

Dual Hatting

Prohibition of dual hatting is already applicable on the Chief Risk Officer (‘CRO’) of a bank. The same has also been implemented in case the of a CCO.

Hence, the CCO cannot be given any responsibility which gives rise to any conflict of interest, especially the role relating to business. However, roles where there is no direct conflict of interest for instance, anti-money laundering officer, etc. can be performed by the CCO. In such cases, the principle of proportionality in terms of bank’s size, complexity, risk management strategy and structures should justify such dual role. [para 2.11 of the 2020 circular] 

Role of the Board in the Compliance function

Role of the Board

The bank’s Board of Directors are overall responsible for overseeing the effective management of the bank’s compliance function and compliance risk.

Role of MD & CEO

The MD & CEO is required to ensure the presence of independent compliance function and adherence to the compliance policy of the bank.

Authority:

The CCO and compliance function shall have the authority to communicate with any staff member and have access to all records or files that are necessary to enable him/her to carry out entrusted responsibilities in respect of compliance issues.

Compliance policy and its contents

The 2007 circular required banks to formulate a Compliance Policy, outlining the role and set up of the Compliance Department.

The 2020 circular has laid down additional points that must be covered by the Compliance Policy. In some aspects, the 2020 circular provides further measures to be taken by banks whereas in some aspects, fresh points have been introduced to be covered in the compliance policy, these have been highlighted below:

1. Compliance philosophy: The policy must highlight the compliance philosophy and expectations on compliance culture covering:

  • tone from the top,
  • accountability,
  • incentive structure
  • Effective communication and Challenges thereof

2. Structure of the compliance function: The structure and role of the compliance function and the role of CCO must be laid down in the policy

3. Management of compliance risk: The policy should lay down the processes for identifying, assessing, monitoring, managing and reporting on compliance risk throughout the bank.

The same should adequately reflect the size, complexity and compliance risk profile of the bank, expectations on ensuring compliance to all applicable statutory provisions, rules and regulations, various codes of conducts and the bank’s own internal rules, policies and procedures and must create a disincentive structure for compliance breaches.

4. Focus Areas: The policy should lay special thrust on:

  • building up compliance culture;
  • vetting of the quality of supervisory / regulatory compliance reports to RBI by the top executives, non-executive Chairman / Chairman and ACB of the bank, as the case may be.

5. Review of the policy: The policy should be reviewed at least once a year

Quality assurance of compliance function

Vide the 2020 circular, RBI has introduced the concept of quality assurance of the compliance function Banks are required to develop and maintain a quality assurance and improvement program covering all aspects of the compliance function.

The quality assurance and improvement program should be subject to independent external review at least once in 3 years. Banks must include in their Compliance Policy provisions relating to quality assurance.

Thus, this would ensure that the compliance function of a bank is not just a bunch of mundane and outdated systems but is improved and updated according to the dynamic nature of the regulatory environment of a bank.

Responsibilities of the compliance function

In addition to the role of the compliance function under the compliance process and procedure as laid down in the 2007 the 2020 circular has laid down the below mentioned duties and responsibilities of the compliance function:

  1. To apprise the Board and senior management on regulations, rules and standards and any further developments.
  2. To provide clarification on any compliance related issues.
  3. To conduct assessment of the compliance risk (at least once a year) and to develop a risk-oriented activity plan for compliance assessment. The activity plan should be submitted to the ACB for approval and be made available to the internal audit.
  4. To report promptly to the Board/ Audit Committee/ MD & CEO about any major changes / observations relating to the compliance risk.
  5. To periodically report on compliance failures/breaches to the Board/ACB and circulating to the concerned functional heads.
  6. To monitor and periodically test compliance by performing sufficient and representative compliance testing. The results of the compliance testing should be placed before the Board/Audit Committee/MD & CEO.
  7. To examine sustenance of compliance as an integral part of compliance testing and annual compliance assessment exercise.
  8. To ensure compliance of Supervisory observations made by RBI and/or any other directions in both letter and spirit in a time bound and sustainable manner.

 Actionables by Banks:

Links to related write ups –

[1] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49937

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=3433&Mode=0

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9598&Mode=0

[4] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11962&Mode=0

[5] https://www.bis.org/publ/bcbs113.pdf

[6]  According to BCBS report, compliance risk is the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organization standards, and codes of conduct applicable to its banking activities”

Moratorium Scheme: Conundrum of Interest on Interest

Siddhart Goel

finserv@vinodkothari.com

Introduction

On September 03, 2020 the Hon’ble Supreme Court (the “court”) while dealing with several petitions on account of Covid related stress from various stakeholders, passed an interim order that that the accounts which have not declared NPA till August 31, 2020 shall not be declared NPA till further orders of the court.[1] Further in its September 10, 2020 order the court asked the government and RBI to file affidavit within two weeks to the court, on issues raised and relief granted thereto.[2]

The primary contention raised before the court for consideration was that the moratorium postpones the burden and does not eases the plight. It would be a double whammy on borrowers since Banks are charging compounded interest, and banks have benefitted during moratorium by charging compounded interest from customers.  The court in its order dated September 10, 2020 observed that individuals are more adversely affected during this period of pandemic. Therefore, the court from the government and RBI, with regard to charging of compound interest and credit rating/downgrading during moratorium period, has sought specific instructions.

Though the matter is sub judice, this write-up aims to provide a legal analyses to the contentions raised in front of the court on the above counts, since any action or direction on the above issues will have an impact on the wider financial system including all, i.e. borrowers, government, banks and other financial institutions as a whole.

Before directly getting into the analyses, it is important to consider material reliefs and incentives announced by RBI and Government of India in respect to COVID19 related regulatory package. A brief history of timelines on series of regulatory reforms to cope with the disruptions caused due to COVID19 is provided below:

 

Waiver of Interest on Interest during moratorium and Systemic Implications

The moratorium scheme deferred the repayment schedule for loans, and the residual tenor, was to be shifted across the board. This essentially meant that all the liabilities of customers towards their repayments (principal plus interests) were to be rescheduled and shifted across the board by the Banks and NBFCs. However, the scheme clearly stipulated that the interest should continue to accrue on the outstanding portion of the term loans during the moratorium period. Moratorium granted to the customers of banks and NBFCs was to reprieve borrowers from any immediate liability to pay. However, charging of interest on outstanding accrued amount is the center of concern in the matter.

The money has time value, which is often expressed as interest in banking parlance. This is one of the most fundamental principles in finance.  Rupee 1 today is more valuable from a year today. If interest is not paid, when it accrues, this in effect means, right to receive interest, which is a predictable stream of cash flow, is not available for reinvestment. Therefore, interest earned but not paid, should earn interest until paid. In debt markets, an obligation towards debt is valued in reference to yield to maturity or present value, all these rest on the compounding interest. These are generally in form of obligations on Banks and NBFCs on the liability side of their balance sheet. Bank deposits and interest thereon also attracts interest, which is adjusted towards total deposit amount of the customer. Therefore, interest on interest is a rule in finance and not a selective event.

Banking is no different to any other commercial business, besides it involves liquidity and maturity transformation and hence is highly leveraged. The short-term demand deposits from customers are converted into long-term loans to borrowers (‘maturity transformation’). Similarly, the customer deposits (liabilities of banks) are payable on demand, while on asset side receivables (repayment of principal and interest) are fixed on due dates (‘liquidity transformation’). It would be wrong to presume that NBFCs are any different from commercial banks. NBFCs largely rely on borrowings from Banks and other financial institutions by way of issuing debt instruments (CP, bonds, etc.), which is reflected on the asset side of the investing commercial banks and other financial institutions. Though obligation of payment on these debt instruments is not payable on demand, but they carry a substantial roll over and default risk.  Hence, these institutions are highly leveraged and inherently fragile by nature of their business. Needless to state that receivables on asset side of banks and NBFC also carry certain risk of default and therefore are inherently risky in nature.

Financial institutions and other investors in market, (like Money Market Funds, Pension funds and etc.) invest in debt of Banks and NBFCs on the basis of strength of assets held by them. These assets are in form of receivables from pool of loans or by way advances to underlying borrowers. Thus, participants in financial markets are highly interlinked and are adversely affected by asset deterioration as a rule. Banks and financial institutions bear credit risk (default risk) of the underlying borrowers on their balance sheet. This credit risk has already increased substantially and would be unfolding further due the impact of pandemic on wider economy.

The waiver of interest charged on interest accrued but not paid during the moratorium, would not only be a loss for the banks and NBFCs, but would also substantially dilute the value of assets held by them. This could lead to an asset liability mismatch on balance sheets of banks. Such waiver of interest on accrued amount could exacerbate the risk of banks and NBFCs defaulting on other financial institutions (‘systemic risk’). The foregoing of charging of interest on interest accrued during moratorium would mean banks and financial institutions partially baling out borrowers either from their own limited funds or from the borrowed funds of other financial institutions. Such a move could entail systemic risk and wider financial catastrophe. As risk of default from comparatively large diversified group of borrowers will be shifted and get concentrated in the balance sheets of banks and financial institutions.

Credit Rating Downgrades and Stressed Assets Resolution

The RBI moratorium notification dated March 27, 2020, freezes the delinquency status of the loan accounts, which have availed moratorium benefit under the scheme. This essentially meant that asset classification standstill will be imposed for accounts where the benefit of moratorium have been extended.[3] As it stands, the RBI, March 27, 2020 circular clearly stipulated that moratorium/deferment/recalculation of loans is provided to borrowers to tide over economic fallout due to COVID and same shall not be treated as concession or change in terms and conditions due to financial difficulty of the borrower.  In essence the rescheduling of payments and interest is not a default and should not be reported to Credit Information Companies (CICs).  A counter obligation on CIC was also imposed to ensure credit history of the borrowers is not impacted negatively, which are availing benefits under the scheme. The relevant excerpt from the notification stipulates as follows:

 “7. The rescheduling of payments, including interest, will not qualify as a default for the purposes of supervisory reporting and reporting to Credit Information Companies (CICs) by the lending institutions. CICs shall ensure that the actions taken by lending institutions pursuant to the above announcements do not adversely impact the credit history of the beneficiaries.”

 Further through notifications dated August 06, 2020 RBI introduced a special window scheme for Resolution of stress on account of COVID 19 (“Special Window”). Banks and financial institutions could restructure the eligible accounts under the Special Window without any asset classification downgrade of borrowers. The Special Window scheme included personal loans to individuals and other corporate exposures. It is relevant to realize that the resolution of stressed assets is highly subjective to borrower’s leverage, sector specific risks, and other financial parameters. Banks and Financial institutions are better placed to implement the resolution or restructuring of the assets (loan accounts) at bank level.

The moratorium scheme and the Special Window resolution framework dated August 06, 2020 (the “Schemes”) were highlights of discussions during the court proceedings extensively. The primary contentions were in respect to limited applicability of these schemes. The schemes and their benefits were available to borrowers whose accounts were standard and not more than 30 DPD as on March 01, 2020 with their respective banks and financial institutions.  Though the legal validity of the schemes were questioned directly in front of the court, but selective nature of schemes conferring benefit on to standard accounts (which are not more than 30 DPDs) only. The exclusion of other borrower accounts was criticised extensively.  But this could form as a part of separate issue, the primary concern here being asset down gradation and credit rating scores.

The Special Window restructuring scheme notification under its disclosures and credit reporting section made an onus on lending institutions to make disclosures on such re-structured assets in their annual financial statements along with other disclosures. However where accounts have been restructured under special facility, and involve ‘renegotiations’, it shall qualify as restructuring and the same shall be governed under credit information polices as applicable. The relevant clause is produced as is herein below:

 “54. The credit reporting by the lending institutions in respect of borrowers where the resolution plan is implemented under this facility shall reflect the “restructured” status of the account if the resolution plan involves renegotiations that would be classified as restructuring under the Prudential Framework. The credit history of the borrowers shall consequently be governed by the respective policies of the credit information companies as applicable to accounts that are restructured.” 

It is argued that the area of application and scope of both the schemes are entirely exclusive and independent remedies available to respective eligible borrowers. Under moratorium scheme the borrower gets benefit of liquidity since all the payments due during the period are deferred. While in the latter, i.e. restructuring scheme the borrower under stress can get their accounts restructured by way of implementing resolution plan without facing any asset classification downgrade upfront. In the latter case, only such restructurings involving ‘renegotiations’ will affect the credit history of the borrowers.

Conclusion

The intention of the RBI and the government was to provide relief to the borrowers, who were gasping for relief after the disruptions caused due to COVID 19. There is no doubt that the COVID-19 outbreak and subsequent lockdown has impacted all level of borrowers, ranging from small to large borrowers, including, individuals to corporates. It would be wrong to presume that those accounts, which were NPA or otherwise ineligible under the schemes, are not affected by the pandemic. Therefore it is always open for the government and RBI to introduce or implement any other scheme or some sort of reprieving mechanism for the ineligible borrowers. However, it is important to consider that even banks and financial institutions are no exception like any other businesses that have been affected by the pandemic; moreover they have been exposed to severe liquidity crunch and on the flip side are witnessing asset quality problems on their balance sheets. Any attempts to tamper or distort with the fundamental principle of finance (‘interest on interest’) or shifting the burden of it on banks and other financial institutions could have a much wider systemic ramifications than the current economic stress.

[1] https://main.sci.gov.in/supremecourt/2020/11127/11127_2020_34_16_23763_Order_03-Sep-2020.pdf

[2] https://main.sci.gov.in/supremecourt/2020/11127/11127_2020_36_1_23895_Order_10-Sep-2020.pdf

[3] Our detailed write up asset classification standstill is available at < http://vinodkothari.com/2020/04/the-great-lockdown-standstill-on-asset-classification/>

The new PSL Master Direction and its Impact on NBFCs

-Siddharth Goel (finserv@vinodkothari.com)

Introduction

The Reserve Bank of India (RBI) issued Master Directions-Priority Sector Lending (PSL) Targets and Classification on September 4, 2020 (‘Master Directions’).[1] The Master Directions consolidates various circulars and guidelines issued by RBI with respect to PSL.

The changes made in the Master Directions primarily deal with targets and sub-targets for classification of loans as priority sector loans. Further there are some addition of new sectors in Eligible categories, along with increase in lending limit of some of the existing eligible categories for priority sector lending.

Our detailed write-up on the topic can be viewed here.

Changes in priority sector norms do not have a direct impact on the NBFCs, but they have an indirect impact. Banks are allowed to acquire loans under Direct Assignment arrangements or invest in pass through certificates backed by loans which qualify the definition of PSL, in order to meet the prescribed targets. Mostly, the banks acquire these receivables from NBFCs who does the origination of the loans. Additionally, banks also engage in co-lending arrangements with NBFCs to originate PSLs. Therefore, it is worthwhile to examine the impact of these changes on NBFCs.

Co-origination of loans by Banks for lending to Priority Sector

RBI through its vide notification RBI/2018-19/49 dated September 21, 2018 issued guidelines on Co-origination of loans by Commercial Banks and NBFC-ND-SI (“Co-origination Guidelines”).[2] These guidelines excluded Regional Rural Banks (RRBs) and Small Finance Banks (SFBs). Essentially, the banks could claim priority sector status in respect of its share of credit while engaging in the co-origination arrangement with NBFC under the Co-origination Guidelines. Provided, the priority sector assets on the bank’s books should at all times be without recourse to the NBFC.

It is pertinent to note that the PSL Master Directions under its para 25 covers Co-origination of loans by Banks and NBFC-ND-SI. The Master Direction specifically excludes, RRBs SFBs and Urban Co-Operative Banks (UCBs) and Local Area Banks (LABs) under the above para. Moreover, the Master Directions under the said para, specifically stipulates that detailed guidelines in this regard are to be governed as provided under Co-origination Guidelines dated September 21, 2018. Hence there are no changes intended to be introduced vis-a-vis Master Direction, to the co-origination of loans by banks and NBFCs.

PSL- Lending by Banks to NBFCs for On-Lending

In the earlier regime, after the review of Priority sector lending by banks to NBFC for On-Lending notification dated August 13, 2019[3], RBI through its notification dated March 23, 2020,[4] extend the priority sector classification for bank loans to NBFCs for on-lending for the FY 2020-21. Further, existing loans disbursed under the on-lending model continued to be classified under Priority Sector till the date of repayment/maturity. The extension notification also stipulated an overall capping limit for calculating bank’s total priority sector lending as produced herein below;

“3. Bank credit to registered NBFCs (other than MFIs) and HFCs for on-lending will be allowed up to an overall limit of five percent of individual bank’s total priority sector lending. Further, banks shall compute the eligible portfolio under on-lending mechanism by averaging across four quarters, to determine adherence to the prescribed cap.”

Para 22 of the Master Directions governs Bank loans to registered NBFCs (other than MFIs). It is highlighted that there is no change in sub-category for On-lending by NBFC, and limits also remain unchanged. The above para in the Master Direction, clearly stipulates that on-lending will be eligible for classification as priority sector under respective categories which is subject to the following conditions:

(i) Agriculture: On-lending by NBFCs for ‘Term lending’ component under Agriculture will be allowed up to ₹ 10 lakh per borrower.

(ii) Micro & Small enterprises: On-lending by NBFC will be allowed up to ₹ 20 lakh per borrower.

The above dispensation is valid up to March 31, 2021 and will be reviewed thereafter. However, loans disbursed under the on-lending model will continue to be classified under Priority Sector till the date of repayment/maturity. Caping of overall limit of Bank Credit to 5 percent has been prescribed under para 24 of the Master Directions.

Investments by Banks in Securitised Assets & Direct Assignment

Investments by banks in securitised assets or assignment/outright purchase of a pool of assets, representing loans by banks and financial institutions to various categories of priority sector, except ‘others’ category, are eligible for classification under respective categories of priority sector depending on the underlying assets. However, earlier the requirement was that the interest rate charged to the ultimate borrower in securitised assets and in case of transfer of assets through direct assignment, shall be capped at Base Rate of the investing bank plus 8 percent per annum.

Therefore, investments by banks, in securitised assets and purchase of assets originated by NBFCs in eligible sectors had to comply with above capping in order to qualify as eligible for PSL. To encourage MSME lending in smaller areas where cost of intermediation is high for the smaller NBFCs, the UK Sinha committee in its report has proposed the cap at Base Rate of the investing bank plus 12% per annum initially and periodical review thereafter. The intent of the recommendation stood on the grounds that price caps are not applicable to banks when they originate directly through branches.

Accordingly, such capping limit has been relaxed and as per the as per the revised requirement the all-inclusive interest charged to the ultimate borrower by the originating entity should not exceed the External Benchmark Lending Rate (EBLR)/ MCLR of the investing bank plus appropriate spread which will be communicated separately. It is expected that the RBI shall be separately communicating the limits to the banks.

The aforesaid relaxation in the interest rate capping would widen the eligibility of loans originated by the NBFCs for securitisation and direct assignment to banks, for meeting the PSL requirement.

Adjustments for weights in PSL Achievement

To address the regional disparities in flow of credit at the district level, currently districts have been ranked on the basis of per capita credit flow. Higher weight (125%) is assigned to the incremental priority sector credit in districts with low per capita credit flow. Similarly, lower weight (90%) has been assigned to incremental PSL in districts with comparatively higher credit flow. The higher PSL credit (125 %) districts are specified in ANNEX-I A and districts with comparatively low PSL credit (90%) are specified in ANNEX-IB of the Master direction. Districts not mentioned in either of the Annex will be having weightage of 100%. PSL incremental credit shall be applicable from F.Y. 2021-2022 onwards.

Thus, for the purpose of above incentives, banks will get incremental PSL credit, if they invest as following:

  • Investment in securitsed assets/direct assignment/outright purchase, of loans originated by NBFCs from high priority districts. The entire investment in PTCs made by the banks, the proportion which is represented by those as priority districts will be weighted at 125% and low priority districts at 90% and others at 100%.
  • On-lending by Banks to NBFCs, wherein NBFCs are further lending in districts with high priority.
  • Incremental credit incentive will be available to Banks, on proportion of their share of loans, to district with high priority under Co-Origination model.

Impact of new Master Directions on NBFCs

The new Master Direction does not seem to impact legal relationship between banks and NBFCs in respect to co-origination of loans and co-lending materially, since all the regulations are similar to the earlier PSL regime. However, the incentives introduced by way of incremental PSL credit to Banks will channel the credit to districts with low credit penetration. Therefore, banks will be benefitted by dealing with NBFCs having portfolio of loans (eligible for PSL) and presence in districts with lower credit penetration.

Further, change in capping, of investments by Banks in securitised assets and direct assignment/ outright purchase of loans, originated by NBFCs is intended to cover loans originated with higher spreads. Further lending to new sub sectors introduced through Master Direction, would also qualify towards PSL target investments by Banks.

The indicative list of new sub-sectors and sub-sectors with enhanced credit limit is reproduced herein below for ready reference.

Agriculture Lending Including Farm Credit (Allied Activities), lending for Agriculture Infrastructure and Ancillary Activities. ·        Inclusion of loans to farmers for installation of stand-alone Solar Agriculture Pumps and for solarisation of grid connected Agriculture Pumps.

·        Inclusion of loans to farmers for installation of solar power plants on barren/fallow land or in stilt fashion on agriculture land owned by farmer

·        Inclusion of loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that are engaged in agriculture and allied services.

·        Inclusion of loans up to ₹2 lakh to individuals solely engaged in Allied activities without any accompanying land holding criteria. This change is in line with recommendation by M.K. Jain Committee7.

·        Inclusion of loans for construction of oil extraction/ processing units for production of bio-fuels, their storage and distribution infrastructure along with loans to entrepreneurs for setting up Compressed Bio Gas (CBG) plants.

·        Laying of Indicative list conveying permissible activities under Food Processing Sector as recommended by Ministry of Food Processing Industries.

·        A credit limit of ₹5 crore per borrowing entity has been specified for Farmers Producers Organisations (FPOs)/Farmers Producers Companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price. This inclusion is as per the M.K Jain Committee Recommendations8.

 

Other Finance to MSMEs In line with the series of benefits being extended to MSMEs, loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that confirm to the definition of MSME has been included under the PSL catergory. (On the basis of recommendations by UK Sinha Committee, to financially incentivise the startups in India)

 

 

Housing Loans

 

·        Increase in Loans up to ₹ 10 lakh (earlier ₹ 5 lakh) in metropolitan centres and up to ₹6 lakh (earlier 2 ₹ Lakh) in other centres for repairs to damaged dwelling units.

·        Bank loans to governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to dwelling units with carpet area of not more than 60 square meters. Under the earlier regime, it was based on cost of dwelling unit which was ₹ 10 lakh per unit.

·        Inclusion of bank loans for affordable housing projects using at least 50% of FAR/FSI (Floor Area Ratio/ Floor Space Index) for dwelling units with carpet area of not more than 60 sq.m.

 

Social Infrastructure

 

Inclusion of loans up to a limit of ₹ 10 crore per borrower for building health care facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres. This is in addition to the existing limit of ₹5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and water improvements at household level, etc.

 

Renewable Energy Increase in loan limit to ₹ 30 Crore for purposes like solar based power generators, biomass-based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities etc. This is to boost renewable energy sector, the earlier limit was up to ₹ 15 Crore.

 

 

[1]https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MDPSL803EE903174E4C85AFA14C335A5B0909.PDF

[2] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT49BAA4688D36A64EAF8DB0BFD99C6FC54C.PDF

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11659&Mode=0

[4] https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=11828&fn=2754&Mode=0

 

Our related write-ups

 

 

FAQs on Resolution of Loan Accounts under COVID-19 stress

– Team Vinod Kothari Consultants P. Ltd. (finserv@vinodkothari.com)

Background

As a part of measures for combating the effect of COVID-19 on the economy, the Reserve Bank of India (RBI), on August 6, 2020[1], introduced Resolution Framework for COVID-19 Related Stress (‘ResFraCoRS’), a special window for resolution of assets undergoing stress due to COVID-19 disruption[2]. This special window was introduced in addition to the Prudential Framework on Resolution of Stressed Assets issued on June 7, 2019 (FRESA)[3]. We have earlier covered FRESA in a separate write up titled “Prudential Framework for Resolution of Stressed Assets: New Dispensation for dealing with NPAs”[4]

The ResFraCoRS notification (‘Framework’) referred to an expert committee which shall identify suitable parameters, recommend sector specific parameters, recommend financial and non-financial conditions to be incorporated in the RP and to vet the RP as discussed above.

Further, the ResFraCoRS notification requires the RP with an amount of Rs. 1500 crores or more to be vetted by the expert committee.

Based on the recommendations of the expert committee submitted to RBI on September 4, 2020[5], the RBI issued a follow-up circular on September 7, 2020[6], which shall be complied, in addition to and as a part of the ResFraCoRS.

We have prepared below, a set of FAQs on ResFraCoRS, based on the aforementioned circulars issued by the RBI.

Timeline of events under ResFraCoRS

Frequently Asked Questions (FAQs) –

General

1.If loan modification/restructuring is a mutual contract between the lender and the borrower, why should I be seeing the regulatory framework?

True, loan modification is a mutual contract between the lender and the borrower. However, the Prudential Guidelines provide that if a facility is restructured, with a view to avert a credit weakness, then the restructured facility is regarded as a non-performing facility. This is a general feature of prudential regulations that assets are to be immediately classified as substandard upon restructuring. Hence, if a restructuring is done without adherence to the regulatory framework, then the facility will be treated as non-performing, immediately upon restructuring,

2. How does the loan modification help the lender, borrower, or both?

Loan modification restructures the servicing requirements of a loan, so that the borrower may meet the obligations. If the terms of the loan remain unconnected to the cashflows of the borrower, the borrower may not be able to perform. A non-performing borrower soon starts attracting penal clauses of the loan facility, thereby pushing the borrower further into the realm of non-performance. Eventually, the problem becomes incapable of resolution, and may result in insolvency or chronic default. A chronic default, while meaning exorbitant cost on the borrower, also causes a clog on the books of the lender, and eventually, results in an inefficient economy.

A good credit system is what can be serviced – there is no point in creating credit which cannot be serviced. Therefore, a loan modification, where required, should be encouraged.

Applicability – lenders and borrowers

3. On what lenders shall the ResFraCoRS be applicable?

ResFraCoRS shall be applicable on all banks, NBFCs, HFCs, AIFIs etc. who have extended loans to eligible borrowers.

4. Are all NBFCs considered as eligible lenders for the purpose of this Framework?

The FRESA was addressed to only systemically important NBFCs and deposit taking NBFCs. However, the ResFraCoRS, which is a special window to deal with COVID related disruptions is applicable to all NBFCs. Unlike FRESA, the ResFraCoRS deals with personal loans also, and NBFCs are a key provider of personal loans.

5. Who shall be the eligible borrowers?

Following shall be the eligibility criteria for the borrowers:

  • The borrower/loan account should not be falling under the list of ineligible loans/exposures provided in the ResFraCoRS notification;
  • In case of resolution of personal loans, the Loan Account should, as on March 1, 2020, be:
    • classified as ‘standard’ in the books of the lender
    • not be in default for more than 30 days with the lender
  • In case of other than personal loans, the loan account should, as on March 1, 2020, be:
    • classified as ‘standard’ in the books of all the lenders
    • not be in default for more than 30 days with any of the lenders
  • The loan accounts should continue to be classified as ‘standard’ in the books of the lender or all the lenders, as the case may be, till the date of invocation of RP.

5A. What kind of personal loans would be covered under the Covid-19 restructuring window? Would it be applicable to car loans/ education loans, etc.?

Under the framework, personal loans refers to loans given to individuals and consist of –

Sr. No. Type of loan covered Definition/ remarks, if any
a. Consumer credit Consumer credit refers to the loans given to individuals, which consists of –

(a)    loans for consumer durables,

(b)   credit card receivables,

(c)    auto loans (other than loans for commercial use),

(d)   personal loans secured by gold, gold jewellery, immovable property, fixed deposits (including FCNR(B)), shares and bonds, etc., (other than for business / commercial purposes),

(e)    personal loans to professionals (excluding loans for business purposes), and

(f)     loans given for other consumptions purposes (e.g., social ceremonies, etc.).

 

However, it excludes

(a)    education loans,

(b)   loans given for creation/ enhancement of immovable assets (e.g., housing, etc.),

(c)    loans given for investment in financial assets (shares, debentures, etc.), and

(d)   consumption loans given to farmers under KCC.

b. Education loan While the above definition of consumer credit excludes education loans, housing loans and loans for purchase of financial assets, these loans are covered within the overall definition of “Personal Loans”
c. Loans given for creation/ enhancement of immovable assets (e.g., housing, etc.)
d. Loans given for investment in financial assets (shares, debentures, etc.)

Thus looking at the above definition of personal loans, car loans, education loans, and several other types of loan exposures would be covered under ResFraCoRS.

5B. From a lender’s perspective, will an entire category of borrowers be eligible to avail the restructuring benefit?

The restructuring option is applicable for personal loans and other eligible exposures, where the borrower account is classified as standard, but not in default for more than 30 days (SMA-0) as on 1st March, 2020. Accordingly, the restructuring benefit would be applicable only to those who are not excluded under the RBI circular- such as MSME borrower with less than Rs.25crore exposure, are classified as SMA-0 as on March 1, 2020 and are having stress on account of Covid19.

In this regard, an entire category of borrower may be said to be facing stress due to the Covid disruption and subject to fulfillment of the eligibility conditions the restructuring benefit may be extended to them.

6. Is a “financial service provider” an eligible borrower, to avail the benefit of the restructuring under the Framework?

 The ResFraCoRs specifically exclude exposures to financial service providers. Therefore, financial service providers are not eligible borrowers. The definition of the term “financial service provider” has been drawn from the Insolvency and Bankruptcy Code, 2016. Apparently, NBFCs are covered under the definition of Financial Service Provider.

6A. Is the scheme applicable to MSMEs as well?

The scheme is applicable on MSME borrowers whose aggregate exposure to lending institutions collectively, is Rs. 25 crores or more as on March 1, 2020. The reason for the criteria of Rs. 25 crores or more collective exposure is because there is a separate notification for Micro, Small and Medium Enterprises (MSME) sector – Restructuring of Advances dated August 6, 2020, which is applicable on MSME borrowers having loan limits up to Rs.25 crores.

7. A bank has given a loan to an NBFC, and discovers that due to the prevailing situation, the NBFC will not be able to meet its obligations as they currently exist. Can the bank restructure the facility?

 As stated above, the ResFraCoRS exclude exposures to FSPs. Therefore, the benefits under the said framework shall not be available in case of restructuring of loans extended to such entities.

However, banks can, at their discretion, consider restructuring of loans extended to FSPs, in such case, the general principles relating to restructuring of loans shall apply, including downgrading of account to NPA etc.

8. Under what circumstances or with what underlying motive is the ResFraCoRS applicable?

Any borrower, whose ability to service loan/credit facilities has been disrupted because of the COVID disruption may be covered by the Framework.

In our view, the types of borrowers may be classed into:

  • Those who had credit weakness/deterioration in credit prior to the beginning of the crisis
  • Those who did not demonstrate credit weakness before the COVID disruption (that is, before March 2020) but have had cashflow stress (mild, moderate of severe) during the COVID disruption; once the moratorium period is cover, their business is normal are not having any issues in their ability to service the facility
  • Those who did not demonstrate credit weakness before the COVID disruption (that is, before March 2020) but have had cashflow stress during the COVID disruption, which now seems to having a lasting impact on their servicing ability;
  • Those who did not demonstrate any credit weakness either before, during or after the COVID disruption

In our view, type (a) does not qualify for the present framework, as the intent of the present framework is only to modify those loans that have been disrupted due to the Covid-19 related stress.

Type (b) also does not require any restructuring. During the 6 months of moratorium, a standstill was granted, and that sufficiently helped the borrower. The borrower is back to the same cashflows as before the crisis/

Type (d) borrowers obviously do not require any restructuring.

It is type (c ) where the Framework requires help. That is where the present Framework operates.

To give an example,

  • A personal loan, home loan or car loan was given to a borrower, which was deducted from his monthly salaries. During the month of April to June, the borrower was given a moratorium as his office was shut and the borrower did not get salaries. From the month of July, the office is back in operation and the borrower keeps on getting salaries as before. Obviously there is no need for restructuring in the present case.
  • An infrastructure sector contract had taken a loan for an excavator. The excavator was lying idle during the months of April- June. July -Aug-Sept are typical monsoon months. It is expected that from October, normal construction activity may pick. The borrower’s servicing ability does not require any loan modification.
  • A loan was given for a CRE project. The project was stuck during April to July. While construction has begun in the month of August, however, it is apprehended that the demand for real estate may remain very sluggish at least over the next 12 months. This seems to be an appropriate case for ResFraCoRS.

Further, under the ResFraCoRS, the eligible borrowers may be divided into 3 categories:

  • Category 1- Borrowers of personal loans;
  • Category 2- Other than personal loan borrowers, which have availed loans from a single financial institution only;
  • Category 3- Other than personal loan borrowers, which have availed loans from more than one financial institution;

9. Is it applicable to both term loans as well as working capital facilities?

The eligibility criteria for ResFraCoRS is based on the asset classification of the borrower and not on the type of loan facility. The demarcation of term loans and working capital facility has to be done for the purpose of granting moratorium, however, for considering restructuring under this framework, any exposure to the borrower shall be covered. Hence, irrespective of the loan account being a term loan or working capital facility, in case it fulfills the eligibility criteria and the lenders have established that the stress in the account is due to covid disruption, the loans may be restructured under this framework.

 Formulation of RP

10. The August 6, 2020 as well as the June 7, 2019 circulars refer to a resolution plan – what exactly is a resolution plan?

The objective of a loan modification is not merely to grant concessions – it is to ensure that the terms of the loan are restructured so as to make the loan serviceable, at the same time, without compromising the interests of the lender(s). Hence, the “resolution plan” is the structured approach of the lender in modifying the terms of the loan so as to make the terms mutually agreeable, and mutually beneficial.

Quite often, in cases of large exposures, a resolution plan may involve capitalization of interest, partial conversion of debt into equity, change in terms of security, infusion of capital by the borrower, etc. Therefore, the resolution plan is a comprehensive approach to loan modification.

It is also notable that there are, often, cases of multiple lenders to the same borrower. Therefore, the loan modification is expected to take care of the interests of multiple lenders in a cohesive approach.

11. What are the different options/approaches in the resolution plan?

In case of personal loans covered in Part A, the resolution plans may inter alia include the following:

  • rescheduling of payments;
  • conversion of any interest accrued, or to be accrued, into another credit facility;
  • granting of moratorium, based on an assessment of income streams of the borrower, subject to a maximum of two years.
  • Modifying the overall tenor of the loan.

In case of other exposures covered in Part B, the RP may involve any action / plan / reorganization including, but not limited to:

  • regularisation of the account by payment of all over dues by the borrower entity;
  • sale of the exposures to other entities / investors;
  • sanctioning of additional credit facilities;
  • allowing extension of the residual tenor of the loan;
  • granting moratorium;
  • conversion of debt into instruments such as equity, debentures etc.
  • change in ownership and restructuring, except compromise settlements which shall continue to be governed by the provisions of the Prudential Framework or the relevant instructions, if any, applicable to specific categories of lending institutions.

The resolution plan may also include sanctioning of additional credit facilities to address the financial stress of the borrower on account of Covid19 even if there is no renegotiation of existing debt.

12. What is the meaning of “invocation” of an RP? Who invokes it? Borrower or lender? If there are multiple lenders, can it be invoked by any lender?

In case of personal loans the borrower and lender should agree to proceed with RP. The date on which the borrower and lender agree to proceed with the RP shall be the date of “invocation”.

In case of other exposures, where there is only one lending institution with exposure to the borrower, the decision regarding the request for resolution by the borrower may be taken by the lending institution as per the Board approved policy of the institution and within the contours of this framework.

This is similar to the existing Corporate Debt Restructuring scheme of RBI where the borrower does not have the inherent right to ask the lenders to restructure, however, the borrower may certainly request lenders to consider the same. Further, for this purpose, the date of invocation shall be the date on which both the borrower and lending institution have agreed to proceed with a resolution plan under this framework.

In case of multiple lenders with exposure to the borrower, the resolution process shall be treated as invoked in respect of any borrower if lending institutions –

  • Representing 75% by value of the total outstanding credit facilities (fund based as well non-fund based), and
  • not less than 60% of lending institutions by number agree to invoke the same.

13. The facility is currently not in default. It was within 30 days past due as on 1st March and thereafter, the facility was covered by moratorium. On 1st September, the lender realises that the cashflows of the borrower may be strained. Does the lender have to wait for any default? Can there be restructuring even when there is no default?

In our view, the resolution may be done for an imminent or incipient, or even apprehended default. The whole idea of resolution is to resolve a problem before it becomes unsurmountable. Hence, the fact of any default is not a precondition.

14. Who will frame the repayment plan?

In case of category 1 and 2 borrowers, the lender shall frame the RP. In case of multiple lenders i.e. category 3 borrowers, execution of ICA is a mandatory requirement wherein all the lenders shall agree on a resolution process, based on which a RP shall be formulated. Further, the Expert Committee shall verify the RP implemented in case the aggregate exposure of the lending institutions is Rs. 1500 crore or more.

15. What are the different stages of the loan restructuring process?

  • Realisation that a restructuring is required
  • Invocation of restructuring plan
  • Framing of restructuring plan
  • Signing of an ICA
  • Implementation of the restructuring plan including putting in place an escrow mechanism etc
  • Review period
  • Post-review period

 16. What are the preconditions for invocation of RP?

For categories 1 and 2:

  • The borrower should be eligible; and
  • The borrower and lender should agree to proceed with RP.

For category 3:

  • The borrower should be eligible;
  • Lending institutions representing at least 75 % by value of the total outstanding credit facilities (fund based as well non-fund based) agree to invoke the RP; and
  • At least 60 % of lending institutions by number agree to invoke the RP.

 17. In case of borrowers with business loans, is there any classification/ categorisation of borrowers based on the size of the exposure?

Under the Framework, it may be useful to classify borrowers into the following sizes:

  • Aggregate exposure of Rs 100 crores or more – Independent credit evaluation (ICE) by any one credit rating agency (CRA) authorized by the RBI under FRESA to be carried out.
  • Aggregate exposure of Rs 1500 crores or more- the RP shall be subject to vetting by the expert committee.

18. One of the measures is providing a moratorium on loan repayment. Will this moratorium be a part of the existing moratorium facility provided to borrowers?

The ResFraCoRS notification provides that in cases where moratorium is granted to eligible borrowers, such moratorium shall be subject to a ceiling of 2 years. It is to be noted that the resolution under this framework is independent of any moratorium or other relief provided to the borrowers under other frameworks introduced by the RBI.

Hence, the above mentioned period of 2 years shall be in addition to the earlier moratorium granted to the borrowers. The earlier moratorium is not to be included in this period of 2 years.

This has been further clarified by para 28 of the ResFraCoRS notification, which states that the moratorium shall come into force immediately upon implementation of the resolution plan.

19. Can the debt be converted into equity instruments?

Conversion of debt into equity may be done provided the amortisation schedule and the coupon carried by such debt securities must be similar to the terms of the debt held on the books of the lending institutions, post implementation of the resolution plan.

Further, equity instruments are to be valued at market value, if quoted, or else, should be valued at the lowest value arrived using the book value or discounted cashflow valuation methodologies. Equity instruments, where classified as NPA shall be valued at market value, if quoted, or else, shall be collectively valued at Re.1. [Refer para 19 (c) and (d) of Annex to the Prudential Framework dated 7th June, 2019].

20. Can the debt be converted into NCDs/ preference shares or any other instrument?

Yes, the special window makes it clear that conversion of debt into NCDs or preference shares or any other instrument may be done. The debentures/ bonds would be valued on the YTM basis as per para 3.7.1 of the Master Circular – Prudential Norms for Classification, Valuation and Operation of Investment Portfolio by Banks[7] dated July 1, 2015 (as amended from time to time) or would be valued as per other relevant instructions as applicable to specific categories of lending institutions.

In case of conversion of any portion of the debt into any other security, the same shall collectively be valued at Re.1.

ICA and Escrow Arrangement

21. Is signing of Inter-Creditor Agreement (ICA) mandatory?

The notification clarifies that signing of ICA is a mandatory requirement for all lending institutions in all cases involving multiple lending institutions, where the resolution process is invoked.

22. Is there any time limit for signing the ICA?

The ICA should be signed within 30 days of invocation of RP.

 23. What will happen if ICA is not signed within the time limit?

In case the ICA is not signed within the prescribed time limit, the invocation of RP shall lapse. Further, additional provision of 20% will have to be maintained in respect of the carrying debt of the borrower in question, i.e. total outstanding of the borrower to all its lenders.

24. How should escrow accounts be maintained in case of ICA?

Escrow accounts shall be required only in case of category 3 borrowers. Para 10 of the follow-up circular states that the escrow account shall be maintained after implementation of RP on borrower-account level, i.e. the legal entities to which the lending institutions.

25. What are the limitations of the restructuring under the ResFraCoRS Framework?

The main limitation of the restructuring under ResFraCoRS is the tenor restrictiction of 2 years, in case of granting of moratorium under resolution plans. Further, the ratios prescribed under the financial parameters by the expert committee are required to be met by 2022 and on an ongoing basis thereafter. It must be noted that the expert committee suggested that the  TOL/Adjusted TNW and Debt/ EBIDTA ratios should be met by FY 2023. Further, some of the conditions (discussed later) of the Prudential Framework of June, 2019 are also additionally applicable in case of ResFraCoRS.

Relevance of the 7th June 2019 – Prudential Framework for Resolution of Stressed assets

26. Is the COVID-related framework a special case within the 7th June 2019 Directions, or is it an independent restructuring proposition?

The ResFraCoRS is a special window under the 7th June, 2019 – Prudential Framework for Resolution of Stressed Assets issued by RBI. Accordingly, the requirements specified in the Prudential Framework of June, 2019 would also apply in case of ResFraCoRS.

It is further clarified that accounts which do not fulfill the required eligibility conditions to be considered for resolution under the ResFraCoRS may continue to be considered for resolution under the Prudential Framework of June, 2019, or the relevant instructions as applicable to specific category of lending institutions where the Prudential Framework is not applicable.

27. What are the major provisions of the June, 2019 Directions which are applicable to the Covid-related restructuring as well?

The ResFraCoRS specifically mentions that without prejudice to the specific conditions applicable to this facility, all the norms applicable to implementation of a resolution plan, including the mandatory requirement of Inter Creditor Agreements (ICA) and specific implementation conditions, as laid out in the Prudential Framework shall be applicable to all lending institutions for any resolution plan implemented under this facility. Terms used in this document, to the extent not defined in the ResFraCoRS, shall have the same meaning assigned to them in the Prudential Framework.

Accordingly, the following major provisions of the Prudential Framework of June, 2019 would apply to the ResFraCoRS as well –

 

Para No. Particulars Requirement
9 Policy for resolution of stressed assets Lenders must put in place a Board approved policy for resolution of stressed assets.

 

This is apart from the policies mentioned in the COVID-related framework and these may be combined into a single policy as well.

10 Inter Creditor Agreement (ICA) The ICA shall provide that any decision agreed by lenders representing 75% by value of total outstanding credit facilities (fund based as well non-fund based) and 60% of lenders by number shall be binding upon all the lenders.

 

Additionally, the ICA may, inter alia, provide for rights and duties of majority lenders, duties and protection of rights of dissenting lenders, treatment of lenders with priority in cash flows/differential security interest, etc. In particular, the RPs shall provide for payment not less than the liquidation value due to the dissenting lenders.

Further, para 13 of the Prudential Framework dealing with inclusions in the RP are also applicable to ResFraCoRS with some modifications/ exceptions stated in para 27 of ResFraCoRS. Furthermore, it seems that para 16 of the Prudential Framework would also apply in case of ResFraCoRS (para 16 deals with deemed implementation in case of RP involving lenders exiting the exposure by assigning the exposures to third party or a RP involving recovery action).

28. The Prudential Framework mentions other requirements such as “Review Period” and “Prudential Norms”. Would these apply in case of ResFraCoRS?

Para 6 of ResFraCoRS states that all norms applicable to “implementation of a RP” under the Prudential Framework of June, 2019 would apply to ResFraCoRS. Accordingly, prudential norms would not be applicable in case of ResFraCoRS as this is already specifically taken care of in ResFraCoRS itself.

Furthermore, other requirements such as review of the borrowers account within 30 days of default would not apply as the ResFraCoRS already prescribed specific eligibility norms in its framework.

Financial Parameters

29. What financial parameters are to be considered while formulating the RP?

The notification has defined a set of 5 key ratios that must be mandatorily considered while finalising the resolution plan in respect of eligible borrowers. While the mandatory ratios must be followed, lenders have the liberty to consider other financial parameters as well, while finalizing the resolution assumptions in respect of eligible borrowers.

The Key ratios and definitions along with additional remarks on the same are presented below –

 

Sr. No. Key Ratio Definition
1 Total Outside Liabilities / Adjusted Tangible Net Worth (TOL/ATNW)

 

(Ceiling)

Addition of long-term debt, short term debt, current liabilities and provisions along with deferred tax liability divided by tangible net worth net of the investments and loans in the group and outside entities.
Remarks – In respect of those sectors where the sector-specific thresholds have not been specified, lending institutions shall make their own internal assessments regarding TOL/ATNW.

 

Compliance to TOL/ATNW agreed as per the resolution plan is expected to be ensured by the lending institutions at the time of implementation itself.

 

Nevertheless, in all cases, this ratio shall have to be maintained as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter.

 

Wherever the resolution plan envisages equity infusion, the same may be suitably phased-in over this period.

 

Another concern in this regard is that the definition of Adjusted Tangible Net Worth provides for deduction of investments and loans in the group and outside entities. Considering a large proportion of the eligible borrowers for this framework will be infrastructure companies, this could be a major problem. Most of the entities engaged in the infrastructure space operate through SPVs, instead of working directly. Therefore, the majority of their assets are deployed in the equity of the SPVs. If the above definition of ATNW is to be followed, these entities will become ineligible for the purpose of this framework.

2 Total Debt / EBITDA

 

(Ceiling)

Addition of short term and long-term debt divided by addition of profit before tax, interest and finance charges along with depreciation and amortisation.
Remarks –

In respect of those sectors where the sector-specific thresholds have not been specified, lending institutions shall make their own internal assessments regarding Total Debt/ EBITDA.

This shall have to be maintained as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter.

3 Current Ratio

 

(Floor)

Current assets divided by current liabilities
Remarks –

Current ratio in all cases shall be 1.0 and above.

This shall have to be maintained as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter.

4 Debt Service Coverage Ratio (DSCR)

 

(Floor)

For the relevant year addition of net cash accruals along with interest and finance charges divided by addition of current portion of long term debt with interest and finance charges.
Remarks –

This shall have to be maintained as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter.

5 Average Debt Service Coverage Ratio (ADSCR)

 

(Floor)

Over the period of the loan addition of net cash accruals along with interest and finance charges divided by addition of current portion of long term debt with interest and finance charges.
Remarks –

ADSCR shall in all cases be 1.2 and above.

This shall have to be maintained as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter.

30. Are the financial parameters required to be considered in all the cases?

The financial parameters shall be considered in case of RP formulated for borrowers eligible under part B of  ResFraCoRS.  Part B of the ResFraCoRS deals with borrowers falling in categories 2 and 3.

31. What are prescribed thresholds to be maintained in respect to the ratios?

The expert committee has prescribed thresholds specific to the nature of the various industries. The annexure to the follow-up circular contains the ceilings/floors prescribed with respect to 26 sectors/industries.

32. What should be done in case there are no sector-specific parameters prescribed with respect to a certain industry?

While the follow-up circular prescribes ratio limits for a wide variety of industries, certain borrowers may not fall in any of those sectors. Further, in the annexure, certain ratios for some sectors have not been prescribed. For such kinds of borrowers, the lenders shall determine the limits considering the financial situation of the borrower, viability of borrower’s business, and the stress on the borrower. However, the current ratio and DSCR in all cases shall be 1.0 and above, and ADSCR shall be 1.2 and above.

33. The sectors specified in the framework do not include financial services, does this mean financial services entities (such as NBFCs, HFCs, who have availed loans from other NBFCs/banks) are not eligible for restructuring under this framework?

The sector specific ratios are provided as general parameters to be considered while formulating RP. This in no way indicates that the borrowers belonging to such sectors shall not be eligible for restructuring.

In case of borrowers falling in the sectors for which the ratios are not specified, the lender shall decide its own limits based on the assessment of the borrower.

However, please refer to our response on eligibility of loans to FSPs under this framework.

34. Who shall meet the ratios?

The borrower is required to meet the ratios at entity-level and the lenders are required to ensure that the same is being met as per the timelines.

For the real estate sector, the expert committee recommended that the ratios with respect to particular projects be met since the loans are usually granted for a project. However, the RBI, in the follow-up circular has not laid any such provision.

35. At what point of time shall these ratios be considered?

The above mentioned key ratios shall have to be maintained by the borrower as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter.

Additionally, TOL/ATNW shall be required to be maintained by the borrower at the time of implementation of the RP itself, as per the resolution plan by March 31, 2022 and on an ongoing basis thereafter.

36. As discussed above, TOL/ATNW shall be maintained at the time of implementation. What should be done in case the ratio is not met?

In case the TOL/ATNW ratio is not met at the time of implementation, the same may require equity infusion by the promoters or conversion of outstanding debt to equity to meet the criteria.

 37. Several instruments are treated as debt due to Ind-AS, would these instruments be considered to be included in the definition of TOL/ATNW?

The definition of TOL/ATNW provided under the notification dated 07th September, 2020 seems to be hinting towards what is legally considered to be a debt. Thus, for the purposes of TOL/ATNW, instruments considered as a debt as per Ind-AS would not come under this definition.

For instance, redeemable preference shares are considered as a debt as per Ind-AS 32. However, for the purpose of TOL/ATNW, redeemable preference shares would not be considered.

38. What parameters shall be considered other than the ratios prescribed by the follow-up circular?

Lenders shall, in addition to the above mentioned ratios, consider pre-Covid-19 operating and financial performance of the borrower and impact of Covid-19 on its operating and financial performance at the time of finalising the resolution plan. Further, they shall also assess the expected cashflows in subsequent years, to ensure that the ratios will be complied with on an ongoing basis.

39. Should these ratios be met by the borrower at the time before covid?

The ResFraCoRS is for the borrowers whose business is otherwise viable but has been affected due to covid disruption. Hence, financial institutions considering to restructure loan accounts under ResFraCoRS, shall evaluate the financial condition of borrower pre and post covid.

These ratios provide a quantifiable basis for evaluating the financial condition of the borrower. Going by the intent, the borrower should positively meet the ratios before crisis and thereafter reach the ratios in the prescribed time.

40. What if ratios are not met in the pre-covid period?

In case the ratios are not met pre covid, it is an indication that financial strength of the borrower was not very stable even before the crisis. Hence, it is not because of the crisis that the borrower is unable to pay. Considering this, the account of the borrower should not be restructured under ResFraCoRS.

It is noteworthy that the ratios are not the sole indicators of financial strength of a borrower. Several other parameters as suitable to the nature of the borrower should also be considered.

 41. What if out of 5, only 3 ratios are met in the pre-covid period?

In case the borrower meets some of the ratios and not all, the lenders shall assess other parameters as well to evaluate financial condition of the borrower and decide whether restructuring shall be done for such borrower account.

42. In case there is only a single lender to a borrower, what ratios or parameters shall be met by such borrower?

Para 5 of the follow-up circular clearly states that the above mentioned ratios shall be met even in case a borrower has availed loan from only one lending institution. These kinds of borrowers shall fall under category 2 discussed above. Even though certain provisions of the ResFraCoRS may not be applicable on this category, maintenance of ratios shall certainly be applicable.

43. What happens if the borrower fails to meet the ratios at any time after implementation of RP?

If the borrower is unable to meet the prescribed ratios it shall be construed as a default on its part to comply with the terms of the RP. This would result in downgrade of asset classification of the borrower to NPA, with all lending institutions, including those who did not sign the ICA, from the date of implementation of the RP or the date from which the borrower had been classified as NPA before implementation of the plan, whichever is earlier.

Provisioning requirements

44. Para 39 of the Framework states that a provision of 10% shall be applicable on accounts which have been restructured in terms of the Framework. How is the restructuring, under this Framework, then different from any other restructuring?

In case of any other restructuring, the classification of the asset gets downgraded to NPA status. The provision requirement on NPAs may be 10%, but that 10% is for a sub-standard asset.

In case of restructuring under the Framework, if the restructuring is done, the asset retains its standard status. Hence, the 10% provision may be regarded as “general loss provision”

It is also notable that there was no requirement  of the 10% provision under the June 2019 Directions. There were disincentives against not implementing the resolution plan within the timelines in para 17 of the Directions.

45. Will there be a case for reversal of the provision as referred to above?

Yes, half of the provisions may be reversed if the borrower repays 20% of the residual debt outstanding to the lender or lenders as the case maybe, provided the asset has not slipped into NPA post implementation of the RP.

Further, the remaining half may also be reversed when additional 10% of the carrying debt is repaid. However, it shall be ensured that such reversal does not result in reduction of provisions below the provisioning requirements as per IRAC provisions.

Credit information reporting

46. Does the fact of restructuring under the Framework have to be reported to CRILC or anywhere else?

 As per the ResFraCoRS, for the purpose of credit reporting, the accounts shall be treated as restructured if the resolution plan involves renegotiations that would be classified as restructuring under the FRESA. The credit history of the borrowers shall consequently be governed by the respective policies of the credit information companies as applicable to accounts that are restructured.

Other Considerations

47. As per ResFraCoRS, a policy is required to be adopted for resolution of assets under the said framework. Will the follow-up circular require amendment to the policy adopted by a company in this regard?

In our view, considering that the key ratios are mandatory, a suitable modification to the policy would be required to be made.

 48. The follow-up circular talks about gradation of borrowers. On what basis shall the gradation be done?

The follow-up circular states that lenders may carry out a gradation of the borrowers. This gradation shall be done based on the impact of the pandemic on a specific sector or the borrower. As per the recommendation of the expert committee, borrowers may be graded into mild, moderate and severe impact borrowers.

While considering the gradation of the borrowers, the amount and risk involved, extent of legal/regulatory compliances involved in the resolution process etc. should also be factored in.

 49. What is the purpose of such gradation?

Gradation of borrowers based on the severity of impact, extent of compliances and the amount and risks involved, enables the lenders to distinguish the accounts that require more attention. Based on the gradation, lenders may decide upon internal procedures such as delegation, time involvement etc, for various categories of accounts.

 

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11941&Mode=0#FT2

[2] Our write-up on the Framework may be referred here- http://vinodkothari.com/2020/08/resolution-framework-for-covid-19-related-stress-resfracors/

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11580&Mode=0

[4] http://vinodkothari.com/2019/06/fresa/

[5] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1157

[6] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11961&Mode=0

[7] https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9904#371

PSL guidelines reviewed for wider credit penetration

By Siddarth Goel (finserv@vinodkothari.com)

Introduction

The Reserve Bank of India (RBI) issued Master Directions-Priority Sector Lending (PSL) Targets and Classification on September 4, 2020 (‘Master Directions’)[1]. The Master Directions are in the nature of a consolidating piece, of various circulars and guidelines issued by RBI in regard to PSL. The objective of Master Directions is to harmonise instructions guidelines for Commercial Banks[2], Small Finance Banks (“SFB”)[3], Regional Rural Banks (“RRBs”)[4], Urban Co-Operative Banks (“UCBs”)[5] and Local Area Banks (“LABs”) for PSL targets and classification under single universe.

The objective of Master Directions is to consolidate all the concerning circulars to PSL under one master direction. However, certain changes have been introduced under the Master Directions in line with the recommendations of Expert Committee on Micro, Small and Medium Enterprises (Chairman: Shri U.K. Sinha) and the ‘Internal Working Group to Review Agriculture Credit’ (Chairman: Shri M. K. Jain).

This write up endeavors to highlight major changes which has been implemented through the said Master Direction that were not forming part of the erstwhile notifications or guidelines in this regard.

Changes in Targets / Sub-targets Classification for Priority Sector

The targets and sub-targets set under priority sector lending is computed on the percentage basis of Adjusted Net Bank Credit (ANBC)/ Credit Equivalent of Off-Balance Sheet Exposures (CEOBE). The Master Directions, has increased the total priority sector lending target for Urban Co-Operative Banks, which is to be achieved through milestones-based targets in a phased manner. Further there has been increase in targets for advances to weaker sections and Small Farmer Margins (SMF) in the agriculture sector. The table below summarises the changes along with timelines for complying with Targets/Sub-targets for PSL.

Categories Domestic Commercial Banks Small Finance Banks RRB Urban Co-Operative Bank#
Total Priority Sector No change No Change No Change Increased in total priority sector target from 40 % to 75% of ANBC or CEOBE whichever is higher.
Advances to Weaker Sections Target * Increased to 12% of ANBC or CEOBE, whichever is higher.

[earlier target was 10%]

Increased to 12% of ANBC or CEOBE, whichever is higher.

[earlier target was 10%]

No Change Increased to 12% of ANBC or CEOBE, whichever is higher.

[earlier target was 10%] 

Agriculture Target * -No Change Small Marginal Farmers (SMF) target increased to 10% of the 18% of ANBC or CEOBE, whichever is higher.

[earlier it was 8 % of 18%] 

Small Marginal Farmers (SMF) target Increased to 10% of 18% of ANBC or CEOBE, whichever is higher.

[earlier it was 8% of 18%]

No Target
Micro Enterprises No Change No Change No Change No Change

# Target of total priority sector to be achieved in phased manner by Co-operative Banks as below.

Existing Target March 31, 2021 March 31, 2022 March 31, 2023 March 31, 2024
40% 45% 50% 60% 75%

 

* Phased manner for achieving Small Marginal Farmers and Weaker Section Targets as below.

Financial Year SMF Weaker Section Target
2020-2021 8% 10%
2021-2022 9% 11%
2022-2023 9.5% 11.5%
2023-2024 10% 12%

Inclusion of Weights in PSL Achievement

From the UK Sinha committee recommendations,[6] in order to address regional disparities in flow of credit to district levels. Adjusted Priority Sector Lending mechanism has been implemented under the new regime, to incentivise flow of credit to underserved districts. There will be no change in the underlying sectors eligible for PSL, however an additional weightage has been given to lending to the more underserved districts. From financial year 2021-2022 onwards weights would be assigned to incremental priority sector credit as follows:

  • Higher weight (125%) would be assigned to the districts where credit flow is comparatively lower, that is per capita PSL less than ₹ 6,000.
  • Lower weight (90%) would be assigned to the districts where credit flow is comparatively higher, that is per capita PSL is greater than ₹ 25,000.

RRBS, Urban Co-operative Banks and Local Area Banks and Foreign Banks have been kept out for the purpose of calculation of PSL weights, due to their limited presence.

Inclusions in Eligible Categories

Along with the inclusion of fresh categories eligible for finance under priority sector there has been some enhancement in the credit limit of the existing categories as well. Some of the changes are as follows-

Agriculture Lending Including Farm Credit (Allied Activities), lending for Agriculture Infrastructure and Ancillary Activities.
  • Inclusion of loans to farmers for installation of stand-alone Solar Agriculture Pumps and for solarisation of grid connected Agriculture Pumps.
  • Inclusion of loans to farmers for installation of solar power plants on barren/fallow land or in stilt fashion on agriculture land owned by farmer
  • Inclusion of loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that are engaged in agriculture and allied services.
  • Inclusion of loans up to ₹2 lakh to individuals solely engaged in Allied activities without any accompanying land holding criteria. This change is in line with recommendation by M.K. Jain Committee[7].
  • Inclusion of loans for construction of oil extraction/ processing units for production of bio-fuels, their storage and distribution infrastructure along with loans to entrepreneurs for setting up Compressed Bio Gas (CBG) plants.
  • Laying of Indicative list conveying permissible activities under Food Processing Sector as recommended by Ministry of Food Processing Industries.
  • A credit limit of ₹5 crore per borrowing entity has been specified for Farmers Producers Organisations (FPOs)/Farmers Producers Companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price. This inclusion is as per the M.K Jain Committee Recommendations[8].
Other Finance to MSMEs In line with the series of benefits being extended to MSMEs, loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that confirm to the definition of MSME has been included under the PSL catergory. (On the basis of recommendations by UK Sinha Committee, to financially incentivise the startups in India)
Housing Loans

 

  • Increase in Loans up to ₹ 10 lakh (earlier ₹ 5 lakh) in metropolitan centres and up to ₹6 lakh (earlier 2 ₹ Lakh) in other centres for repairs to damaged dwelling units.
  • Bank loans to governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to dwelling units with carpet area of not more than 60 square meters. Under the earlier regime, it was based on cost of dwelling unit which was ₹ 10 lakh per unit.
  • Inclusion of bank loans for affordable housing projects using at least 50% of FAR/FSI (Floor Area Ratio/ Floor Space Index) for dwelling units with carpet area of not more than 60 sq.m.
Social Infrastructure

 

Inclusion of loans up to a limit of ₹ 10 crore per borrower for building health care facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres. This is in addition to the existing limit of ₹5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and water improvements at household level, etc.
Renewable Energy Increase in loan limit to ₹ 30 Crore for purposes like solar based power generators, biomass-based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities etc. This is to boost renewable energy sector, the earlier limit was up to ₹ 15 Crore.
Others

 

Inclusion of loans for meeting local needs such as construction or repair of house, construction of toilets not exceeding ₹2 lakh provided directly by banks to SHG/JLG for activities other than agriculture or MSME.

Investments by Banks in Securitised Assets & Direct Assignment

Earlier the interest rate charged to the ultimate borrower was capped at Base Rate of the investing bank plus 8 percent per annum. Post UK Sinha Committee recommendation,[9] the all-inclusive interest charged to the ultimate borrower by the originating entity should not exceed the External Benchmark Lending Rate (EBLR)/ MCLR of the investing bank plus appropriate spread which will be communicated separately.

The intent of the recommendation stood on the grounds that price caps are not applicable to banks when they originate directly through branches. Therefore, to encourage MSME lending in smaller areas where cost of intermediation is high by the smaller NBFCs, the committee proposed the cap at Base Rate of the investing bank plus 12% per annum initially and periodical review thereafter.

Conclusion

The Master Direction aids in compilation and provides easy understandability of all the guidelines at one place. The two committee reports recommendations have aided in recognising important sub-sectors of economy which were not covered under earlier regimes. Loans to starts-ups in agriculture and allied activities, loans to healthcare, sanitation along with impetus on renewable energy will not only bolster flow of credit in these sectors but also aimed at improving socio-economic conditions in the country. The introduction of incentive on incremental PSL by ranking of districts on basis of per capita credit flow could be an enabler for the deeper penetration of credit in rural economy. Therefore, the new Master Direction is a welcome move and will help in achieving better channeling of credit in the desired sectors of the economy.

[1] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MDPSL803EE903174E4C85AFA14C335A5B0909.PDF

[2] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/33MD08B3F0CC0F8C4CE6B844B87F7F990FB6.PDF

[3] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11644&Mode=0

[4] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11604&Mode=0

[5] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11274&Mode=0

[6] Para 9.24, Report of the Expert Committee on Micro, Small and Medium Enterprises, (UK Sinha Committee) https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=924

[7] Para 1.7.6, Report of the Internal Working Group to Review Agricultural Credit, ( M. K Jain Committee) https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=942#CP28

[8] Para 2.7.5, Report of the Internal Working Group to Review Agricultural Credit, ( M. K Jain Committee) https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=942#CP28

[9] Para 9.24, Report of the Expert Committee on Micro, Small and Medium Enterprises, (UK Sinha Committee) https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=924

Udyam becomes mandatory: RBI clarifies Lenders’ stand

-Kanakprabha Jethani and Anita Baid (finserv@vinodkothari.com)

Background

On June 26, 2020, the Ministry of Micro, Small and Medium Enterprises (MoM) released a notification[1] changing the definition of MSMEs and introducing a new process for MSME registration. The notification also stated that the existing MSME registrations (i.e. Udyog Aadhaar Number (UAN) or Enterprise Memorandum (EM)) shall be invalid after March 31, 2021. While the enterprises have to obtain Udyam Registration, the RBI has also made it mandatory for the lenders to ensure that their MSME borrowers have obtained the registration. The RBI through its notification dated August 21, 2020, has provided certain clarifications on its existing guidelines and stated clearly the things to be taken care of by the lenders. The following write-up intends to provide an understanding of the said clarifications and analyze them at the same time.

Udyam Registration to be the only valid proof

Under the existing framework for MSME registration, MSME borrowers had an option to provide either their Udyog Aadhaar Number (UAN), Entrepreneurs Memorandum (EM) or a proof of investment in plant and machinery or equipment being within the limits provided in the erstwhile definition along with a self-declaration of being eligible to be classified as an MSME. However, since the MoM notification stated that the UAN or EM shall be valid only till March 31, 2021, the MSMEs will have to compulsorily get registered under the Udyam portal, as per the revised definition. Hence, the lenders shall before March 31, 2021, obtain Udyam Registration proof from their existing as well as new borrowers.

In case of loans whose tenure shall end before March 31, 2021, the above requirement may not be relevant i.e. to obtain Udyam Registration since the existing registration submitted earlier by the borrowers shall be valid till the expiry of the loan tenure.

Pursuant aforesaid notifications, it seems that from March 31, 2021, Udyam Registration shall be the only valid proof for an entity to be recognized as an MSME. In such a case, it is pertinent to note that a notification issued by Ministry of MSMEs on July 17, 2020[2], which provides a list of activities that are not covered under Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) for Udyam Registration. The list of activities is as follows:

  • Forestry and logging
  • Fishing and aquaculture
  • Wholesale and retail trade and repair of motor vehicle and motorcycles
  • Wholesale trade except of motor vehicles and motorcycles
  • Retail trade except of motor vehicles and motorcycles
  • Activities of households as employees for domestic personnel
  • Undifferentiated goods and services producing activities of private households for own use

A major section of Indian business in small or micro businesses involved in trading activities. Will keeping them outside the coverage of registration mean they don’t get benefits as that of registered MSMEs?

Let us understand the same by analysing the provisions of various schemes introduced by the Government.

Relevance of definition under the MSMED Act

The notification of Ministry of MSME dated January 10, 2017[3] provides that every micro, small and medium engaged in the manufacturing of goods or rendering of services with total investment in plant and machinery below the limit specified in section 7 of the said Act, shall file the memorandum. This makes it evident that the requirement for registration is mandatory for all MSMEs defined under section 7 of the MSMED Act.

However, various schemes introduced for MSMEs either refer to the definition of MSMEs provided in the MSMED Act or make reference to the limits specified under the MSMED Act or specifically include certain categories of entities under its scope. Let us look at some of these schemes[4] that are extending benefits to MSMEs and their eligibility criteria.

Bank loans to MSMEs under Priority Sector

Bank loans to MSMEs, for both manufacturing and service sectors, are eligible to be classified under the priority sector as per the norms provided by the RBI[5].

Till 2009, there was a separate category for retail trade which included retail traders/private retail traders dealing in essential commodities (fair price shops), and consumer co-operative stores. The same was included in the category of MSEs later through a notification[6] issued by the RBI.

However, from 2013 onward[7], for MSE lending, the reference was made to the MSMED Act for the investment limits in case of manufacturing and service sector.

However, the PSL Directions refer to the investment limits for determining the MSME classification and there was no explicit requirement to have UAN/URN. For the purpose of classification under PSL, it is implicit that the definition of MSME should come from the MSMED Act.

Post the amended definition of MSME and the procedure for filing the memorandum under the Udyam Registration, it seems that registration as an MSME shall be a necessity and accordingly be considered as a pre-requisite by lenders.

Interest Subvention Scheme

The ‘Interest Subvention Scheme for Incremental Credit to MSMEs, 2018’ was notified to Scheduled Commercial Banks and NBFCs which specifically required the MSMEs to be registered for being eligible under the scheme. The guidelines were further modified by SIDBI in December 2019 and notified by RBI in February 2020[8], wherein the requirement of Udyog Aadhaar Number (UAN) was dispensed with for units registered for Goods and Service Tax (GST).

Further, enterprises that are not registered under GSTN were allowed to either submit Income Tax Permanent Account Number (PAN) or their loan account should be categorised as MSME by the concerned bank. Trading activities without UAN were also allowed to avail the benefit under this scheme. Therefore, for the purpose of this scheme, the registration under the MSMED Act is not mandatory.

Consequently, enterprises engaged in trading activities can also avail the benefit of this scheme.

One-time Restructuring

RBI vide its notification dated February 07, 2018[9], provided relief for MSME borrowers registered under Goods and Services Tax (GST), to support these entities in their transition to a formalised business environment.

In furtherance to the aforesaid notification, the notification dated June 6, 2018[10] extended the scope to all MSMEs, including those not registered under GST, as a standard asset.

By virtue of another notification dated January 1, 2019[11], RBI permitted a one-time restructuring of existing loans to MSMEs classified as ‘standard’ without a downgrade in the asset classification. This was further extended vide notification dated February 11, 2020[12] and August 6, 2020[13]. The extension notifications make reference to the initial January 2019 notification for the detailed instructions wherein it refers to MSME as defined under the MSMED Act. Further, the notifications require the MSME to be GST registered unless otherwise exempted from GST registration. Hence, GST registration is not mandatory to avail the one-time restructuring benefit. However, MSME registration seems to be compulsory given the reference to the MSMED Act.

Credit Guarantee Fund Scheme for Micro and Small Enterprises-I (CGS-I)

The scheme defines eligible borrower as-New or existing Micro and Small Enterprises, as defined in the Act, to which credit facility has been provided by the lending institution without any collateral security and/or third-party guarantees.

Subsequently, MSE Retail Trade was added vide a circular[14] issued by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) under its ambit for fresh credit facilities eligible for guarantee coverage. Explicit inclusion of retail trade clarifies that benefits of this scheme shall be available to retail traders as well, subject to conditions provided in the scheme.

Credit Guarantee Fund Scheme for Micro and Small Enterprises-II (CGS-II for NBFCs)

The definition of eligible borrowers under this scheme is the same as that of CGS-I. Initially, the eligibility criteria specifically excluded retail trade and registration was a mandatory requirement under the scheme. Later on, the scheme was amended to do away with the registration requirement and specifically include MSE retail trade in its ambit.

Given the August notification issued by RBI, it is clear that the intention of the RBI is to ensure that lending institutions, such as banks and NBFCs, obtain Udyam Registration Certificate from the borrowers to pass on the benefits provided by the RBI.

Hence, unless a scheme specifically provides the inclusion of activities that are not eligible for registration or does not mandate the requirement of registration as an MSMC, one shall refer to the definition provided under the MSMED Act. Further, in case of reference it made of the MSMED Act, it can be implied that registration is a mandatory requirement.

Is PAN and GSTIN mandatory?

Based on MoM notification, Udyam Registration can also be obtained on a self-declaration basis[15]. The notification states-

“The turnover related figures of such enterprise which do not have PAN will be considered on self-declaration basis for a period up to 31st March, 2021 and thereafter, PAN and GSTIN shall be mandatory

Further, RBI notification states-

“Udyam Registration Certificate’ issued on self-declaration basis for enterprises exempted from filing GSTR and / or ITR returns will be valid for the time being, up to March 31, 2021.”

A plain reading of these provisions would bring one to a conclusion that in order to obtain registration as an MSME, one would be required to mandatorily obtain PAN and GSTIN. However, going by the principle, the law itself exempts certain classes of persons to obtain PAN and/or GSTIN. It would be counter-intuitive to draw upon a compulsion on such persons to obtain PAN and GSTIN for the purpose of getting registered as an MSME.

As discussed above, the one-time restructuring benefit introduced by RBI requires the MSME to be GST registered unless otherwise exempted from GST registration. However, for the purpose of the registration as an MSME without GST registration ( in case exempted), there is still a lack of clarity.

The lenders would obviously expect clarification from the MoF or the MoM on the applicability of this clause on persons not required to obtain PAN or GSTIN. In the absence of any clarification or leeway specified for such persons, the lenders would be bound to ensure that their borrowers obtain Udyam Registration using PAN and GSTIN.

Connecting the Disconnect

In 2017, the RBI issued a notification[16] providing a list of documents to be relied upon and method for calculation of the value of plant and machinery or equipment. As per the notification, the purchase value of the plant and machinery or equipment shall be considered and not the book value (purchase value minus depreciation).

However, the Udyam registration process considers the value of plant and machinery or equipment based on the ITR filed by the enterprise. The ITR contains the value of machinery left after deducting depreciation i.e. Written Down Value (WDV).

This created a disconnect between the earlier RBI guidelines and the process of registration. Considering this disconnect, the RBI on July 2, 2020, released a notification[17] with the updated definition and directives for calculation of investment in plant and machinery or equipment, which is in line with the MoM notification. Further, the RBI has clarified that the existing guidelines provided in the 2017 notification shall be superseded by the July 2, 2020 notification.

Conclusion

While the RBI has made an effort to clarify the stand of lenders and things to be done by them owing to the change in the definition of MSMEs, a few operational difficulties still persist, specifically relating to obtaining the PAN and GSTIN. It is clear that the motive of the government behind introducing consistent developments for MSMEs is to uplift the small businesses in the country. The lending market awaits clarifications/ reliefs from the government on these operational difficulties. A relief from the government will be a step in the direction of better financial inclusion.

 

[1] https://rbidocs.rbi.org.in/rdocs/content/pdfs/IndianGazzate02072020.pdf

[2] https://udyamregistration.gov.in/docs/OM_UAN_17_7_2020.pdf

[3] http://dcmsme.gov.in/Reviesd_UAM_Noti_222017.pdf

[4] Details of various schemes for MSMEs can be referred here- http://vinodkothari.com/2020/05/primer-on-msme-financing/

[5] The conditions may be referred to from the Master Circular for PSL- https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10497&Mode=0

[6] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=5280&Mode=0

[7] Refer notification- https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=8191

[8] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11803&Mode=0– the notification was however addressed to banks and not NBFCs

[9] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11216&Mode=0

[10] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11289&Mode=0

[11] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11445&Mode=0

[12] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11808&Mode=0

[13] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11942&Mode=0

[14] https://www.cgtmse.in/files/Circular_No.141.pdf

[15] Read the detailed process here- http://vinodkothari.com/2020/07/udyam-portal-the-pristine-msme-registration-process/

[16] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11050&Mode=0

[17] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11951&Mode=0

 

Decriminalization of offences under commercial laws- A step further towards ease of doing business

Additional relief from COVID-19 disruptions

Based on the recommendations of the Monetary Policy Committee

-Financial Services Division (finserv@vinodkothari.com)

Extension of the restructuring norms for MSME debt

The RBI via a notification on 1st January 2019[1] had allowed NBFCs and banks to restructure their advances to MSMEs, classified as ‘standard’, without any asset classification downgrade and the same was extended further on 11th February 2020.[2]

Through the notification dated August 6, 2020[3], the RBI has again extended the timeline for restructuring till March 31, 2021.

Further, the notification dated August 6, 2020 provides that the accounts which may have slipped into NPA category between March 2, 2020 and date of implementation i.e. from August 6, 2020 to March 31, 2021, may be upgraded as ‘standard asset’, as on the date of implementation of the restructuring plan.

For accounts restructured under these guidelines, the lenders are required to maintain an additional provision of 5% over and above the provision already held by them with respect to standard assets. Though, the extension notification does not specifically provide such provisioning requirements for NBFCs, however, reading in consonance with the January 2019 notification, it can be said that the requirement is for both banks and NBFCs.

The extension of relaxation would chiefly benefit the MSME borrowers who are having sound businesses as well as repayment capabilities however, are unable to meet their obligations post 1st March 2020, due to widespread disruption caused by the pandemic. The move would ensure that MSMEs that are having a viable business standing are not hit by negative classification just because of short term volatilities.

Advances against Gold Ornaments and Jewellery

The existing RBI guidelines[4] require that for the loan granted by banks against the security of gold jewelry i.e. gold loans a Loan-to-Value (LTV) Ratio of maximum upto 75% has to be maintained. Through notification dated August 6, 2020[5], LTV requirement has been relaxed temporarily. Accordingly, banks may now lend up to 90% of the amount of gold jewellery pledged until March 31, 2021.

Banks may, while sanctioning new loans, grant relatively more amount of loan. Further, using the advantage of extended LTV, banks may also consider providing top-up loans to the existing borrowers, on existing security of gold jewellery.

After March 31, 2021, the LTV requirement shall be restored back to 75%. While the notification mentions that fresh loans granted after such date shall have an LTV of 75%, it is silent about the treatment of existing loans. Clarification in this regard is expected from the RBI.

In the absence of any clarification, the loans given before March 31, 2021 shall also be bound by the LTV of 75% after such date. Accordingly, the banks should either structure the loan in such a manner that the LTV comes down to 75% after receiving repayments up to March 31, 2021 or the banks may have to call back a certain portion of loan so as to meet the LTV requirement after such date.

It may also be noted that despite the high amount of market penetration of NBFCs in gold loan sector[6], no such relaxation has been provided to NBFCs.

Priority Sector Lending by Banks

The RBI has revised the existing guidelines on priority sector lending (PSL) by banks[7]. While the detailed PSL guidelines are yet to be released, following are a few major changes that will be introduced:

  • Start-ups would be a new sector to come under the ambit of priority sectors
  • The limits for renewable energy, including solar power and compressed bio-gas plants, small and marginal farmers and weaker sections are proposed to be increased.
  • An incentive-based system shall be introduced, which shall address the regional disparities in the flow of priority sector credit. Under this system, higher weight will be assigned for incremental priority sector credit in the identified districts where credit flow is comparatively lower and vice versa.

 

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11445&Mode=0

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11808&Mode=0

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11942&Mode=0

[4] https://www.rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=9124 and https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8701&Mode=0

[5] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11944&Mode=0

[6] https://assets.kpmg/content/dam/kpmg/in/pdf/2020/01/return-of-gold-financiers-in-organised-lending-market.pdf

[7] https://m.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10497