RBI Resolution Framework – 2.0: Resolution of COVID-19 related Stress of Individuals and Small Businesses

The significant rise in the novel Covid-19 pandemic across the world, India has witnessed a massive surge of cases for the year 2021. Numerous industrial sectors have faced a major hit amid the ongoing pandemic and particularly the small businesses and individuals faced a massive setback who had availed loans and advances for business purposes resulting in upsurge in new uncertainties and risks. In this regard Reserve Bank of India (RBI) governor Shaktikana Das vide its notification dated 5^th May, 2021 announced additional measures Resolution Framework- 2.0: Resolution of Covid-19 related Stress of Individuals and Small Businesses.

OBJECTIVE

The onus behind introducing Resolution Framework-2.0 is to alleviate uncertainties and stress on individual borrowers and small businesses, who are finding it difficult to repay loans on time due to the economic disruptions caused by the second wave.

Previously RBI vide its circular issued dated on 6^th August, 2020 provided “Resolution Framework for Covid-19 Stress” also widely known as the Resolution Framework- 1.0 which offered a window in order to enable the lenders to effectuate a resolution plan which particularly targets the corporate exposures without the need of change in ownership, and personal loans, whilst classifying such exposures as ‘Standard’ which were subjected to specified conditions. The Resolution Framework- 2.0 brings out additional measures which are broadly in line with the contours of the Resolution Framework- 1.0 with suitable changes and improvements.

The circular has been divided into three parts, which are as followed:

1. PART A- deals with the requirements pertaining to specific resolution of advances provided to individuals and small businesses.
2. PART B- relates to working capital support for:
3. Individuals- who have availed loans for the purpose of business operations.
4. Small Businesses- previously where resolution plans were executed.
5. PART C- enlists the requirements related to disclosure for lending institutions with respect to the resolution plans which were implemented.

Now let us study the key features and changes introduced under this Framework:

1. RESOLUTION ADVANCES TO INDIVIDUALS AND SMALL BUSINESSES
2. Applicability:

The broad categories of borrowers to whom this policy is applicable are as followed:

1. Advances and loans to the individuals and small businesses who have not availed themselves of any resolution under the Resolution Framework 1.0.
2. For individuals and small businesses, if the previous resolution plan was implemented (in accordance with the Resolution Framework 1.0) with a moratorium of less than 24 months, are now allowed to extend the moratorium / extension of residual tenure for up to 24 months.
3. For “Small Businesses”, working capital support has been provided where resolution plans have been implemented in line with the Resolution Framework 1.0

2. Eligibility:

1. For individual borrowers and small businesses to effectuate resolution plans, the lending institutions are permitted to offer limited windows with respect to their credit exposures while declaring the same as ‘Standard’.
2. Borrowers i.e., individuals and small businesses who earlier had not opted the Resolution Framework 1.0 would be now able to avail Resolution Framework 2.0, provided that the loan amount is up to INR 25 crore as on 31^st March, 2021.
3. Individuals who had availed personal loans in the terms of the “XBRL Returns- Harmonisation of Banking Statistics” are also now eligible.
4. The lending institutions have aggregate exposure of not more than Rs.25 crore to such small businesses, as well as those engaged in retail and wholesale trade, apart from those classified as micro, small and medium enterprises as on March 31, 2021.

However, these eligibilities are subjected to the conditions that the borrower accounts or credit facilities must not belong in the categories as mentioned in Clause 2 (a) to Clause 2 (e) of the Annex to the Resolution Framework 1.0 and are subjected to special exemption in cases of convergence of the standards for loans which were sorted earlier, provided that the borrower accounts shall not have availed any of the resolution of the Resolution Framework-1.0. Provided further that it must be established that the borrowers are facing financial stress due to Covid-19.

Under the purview of this framework the following classes of borrowers or credit facilities shall not be eligible for a resolution plan:

1. The credit facilities provided by lending institutions to their own staff or personnel.
2. Micro, small & Medium Enterprises (MSME) borrowers whose cumulative exposure to lending institutions is less than or total, is ₹25 crore as on 1^st March, 2020.
3. Farm credit comprising of:
4. Loans provided to individual farmers as well as Self Help Groups (SHGs) or Joint Liability Groups (JLGS), i.e., individual farmers groups and Farmers in proprietorship firms who are directly involved in Agriculture.
5. Loans provided to farmers directly engaged in Agriculture including- corporate farmers, farmer’s producer organisations/companies of individual farmers, partnership firms and co-operative of farmers.
6. Loans offered to PACS (Primary Agricultural Credit Societies), FSS (Farmers Service Societies) and LAMPS (Large-sized Adivasi Multi-Purpose Societies for on-loaning facilities to agriculture.
7. Other relevant instructions as applicable to specific category of lending institutions.
8. Exposures of lending institutions to financial service providers.^[1]
9. Exposures of lending institutions to Central and State Governments; Local Government bodies (e.g., Municipal Corporations); and, body of corporates established through an Act of Parliament or State Legislature.^[2]

1. Scope/Permitted features of resolution plans and implementation:
2. Under Resolution Framework 2.0 among other resolution plans implemented, it also includes rescheduling of payments, option to convert into another credit facility in case of any interest accrued or to be accrued, revisions made in working capital sanctions, moratorium grant etc. which will be calculated based on the assessment of sources of income.
3. In case of securities issued by the borrowers, the resolution plan may also offer for conversion of a part of the debt into equity or other marketable, non-convertible debt securities, wherever applicable. This provision shall be governed by the terms laid down under the Paragraph 30-32 of the Annex to the resolution Framework-1.0 i.e., conversion into other securities and valuation.

2. Need for Board Approval:
3. Within four weeks from the date of Resolution Framework- 2.0, lending institutions are required to frame Board approved policies, referring to the implementation of feasible resolution plans for borrowers who are eligible under this framework (provided only to those borrowers having stress due to Covid-19).
4. Such policy shall enlist the details of the eligibility of borrowers, the diligence considerations and must be adhered by the lending institutions and must further offer a system for redressing the grievances of borrowers requesting for resolution or are undergoing resolution particularly under the Resolution Framework 2.0.

3. Resolution Process Timeline:
4. In accordance with the instructions contained in the Resolution Framework-2.0 the lending institution shall assess the applicant’s eligibility and the Board approved policy put in place, shall be completed, based on which the application shall be communicated in writing to the applicant within thirty days of receipt of such applications.
5. Any decision taken by a lending institution needs to be taken at an autonomous level rather than the decision of other financial institutions.
6. It is mandatory that the resolution plan must be finalised and the same shall be implemented within ninety days under this window from the date of invocation of the resolution process. The resolution plan shall be deemed to be implemented subject to the fulfilment of all the following conditions:
7. Execution of all related documentation, including necessary agreements between lending institutions and borrower and if any collaterals provided, are completed by the lenders in regard to the resolution plan implemented.
8. When it is duly reflected in the books of lending institutions in case any changes are made in the terms of conditions.
9. As per the revised terms, the borrower must not be in default with the lending institution.
10. Duration:
11. In case moratorium period is granted, it may be extended maximum up to two years and upon implementation of the resolution plan it must immediately come into force.
12. An extension up to 2 years shall be granted to the borrower for residual tenor of the loan facilities (inclusive of moratorium, if permitted).

5. Asset classification and provisioning:
6. The asset classification of borrower’s account classified as Standard may be retained upon the implementation as followed in the terms of this circular, in case a resolution plan is implemented.
7. Whereas borrowers’ accounts which may have gradually turned into NPA between invocation and implementation may be upgraded as ‘Standard’, as on the date of implementation of the resolution plan.^[3]
8. ‘Master Circular- Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances’ (dated 1^st July, 2015) or any other relevant instructions as applicable to specific category of lending institutions (“extant IRAC norms”)- the conditions enlisted in these shall be responsible to regulate any subsequent asset classification.
9. Cases where resolution processes have been invoked for eligible borrowers, lending institutions now have been permitted to sanction additional finance (even before the implementation) so that they can meet the interim liquidity requirements of such borrowers. Notwithstanding, the same is subjected to the perquisite that in case the resolution plan has not been implemented within the limited period, the classification of asset of the additional finance sanctioned would be bound to follow the actual performance of the borrower with respect to the performance of the rest of the credit facilities or otherwise such additional finance, whichever is worse.

6. Convergence of the norms for loans resolved previously:
7. Where the resolution plans had previously allowed no moratoria or moratoria of lesser than 2 years and / or extension of remaining tenor by a period of less than two years for loans of such eligible borrowers, the lending institutions are now allowed to alter such plans only to the extent in increasing the period of moratorium / extension of residual tenor subject to the caps mentioned in Clause 12 of the Resolution Framework- 2.0.
8. Under Resolution Framework – 1.0 the gross caps on moratorium and / or extension of residual tenor is now combined with the Resolution Framework- 2.0 and the same shall be of two years.

2. WORKING CAPITAL SUPPORT FOR SMALL BUSINESSES WHERE RESOLUTION PLANS WERE IMPLEMENTED PREVIOUSLY:

1. Individuals whose resolution plans had been implemented in line with terms of the Resolution Framework 1.0 including those engaged in retail and wholesale trade (excluding MSMEs) and individuals who had availed loans for business purposes, the lending institutions are now allowed, as a one-time measure in order to review the working capital sanctioned limits and/or drawing power based on an appraisal of the working capital cycle, decrease in margins, and other factors while the same shall not be treated as restructuring.
2. In the same vein, the decision relating to these issues shall be made by lending institutions by 30^th September, 2021, with the margins and working capital limits being restored to the levels outlined in Resolution Framework 1.0 by 31^st March, 2022.

3. DISCLOSURES AND CREDIT REPORTING:

1. Lending institutions publishing quarterly financial statements are required to make disclosures in the financial statements for the quarters ending September 30 and December 31, 2021. Additionally, resolution plans implemented in compliance with Part A of Resolution Framework-2.0 should also be included in the disclosures as prescribed in the Resolution Framework- 1.0.
2. A quarterly disclosure may also be made available starting from the second quarter of 2021 of the number of borrowers whose accounts have been modified and implemented, as well as the aggregate exposure of the lending institution to such borrowers may also be disclosed.
3. If a lending institution is required to publish only annual financial statements, it must also make the required disclosures in its annual financial statements.
4. Whenever financial institutions report credit information on borrowing accounts which have been restructured under this framework, the accounts need to be indicated as “restructured due to Covid-19”. 

ANALYSIS

Amid the resurgence of Covid-19 in India, the most vulnerable sector who have suffered major blows are the small businesses and individuals. The Resolution Framework 2.0 for debt restructuring for stressed individuals and small businesses, is a pragmatic move and will surely bring much needed relief, as with the enhanced threshold, a substantial number of borrowers would be eligible under the framework.

An increase in the period of the moratorium and/or extending the residual tenor up to a total of 2 year has been permitted to the lending institutions to modify and restructure advances, whereas the Resolution Framework 1.0 had permitted a moratorium of fewer than two years, to the individual borrowers and small businesses who had availed such resolution. To understand this, let us consider the following illustration- suppose an individual had selected for an eight-month moratorium under the Resolution 1.0 Framework and the term of the loan post restructuring increased by further six months. The aggregate restructuring period now comes to a total of fourteen months. In such a situation, an individual can opt for restructuring available under the Resolution 2.0 Framework for ten more months. This merely lays down that the new resolution framework will permit banks to offer a moratorium or revised loan repayment scheme to fraught borrowers who are stressed due to the Covid-19. The framework may prove to be conspicuous to individuals and small businesses as it notably provides loan relief measures which is also available to individuals who have opted for restructuring in the previous, but then not to the extent of two years.

CONCLUSION

To conclude, individuals and small businesses play a nascent role in today’s economy. In order to protect lives and the livelihoods it is commendable on part of RBI which has taken the financial sector battle against Covid 2.0 head on. The central bank’s actions will undoubtedly improve the Indian economy and pave a stimulus path for individuals and small businesses to expand their operations without fear of financial ruin. The extension window for the earlier availed borrower would surely help to alleviate liquidity issues and make it easier to fulfil the inclusive growth goal.

[1] Reserve Bank of India, Notification no. DOR.STR.REC.11/21.04.048/2021-22, Resolution Framework – 2.0: Resolution of Covid-19 related stress of Individuals and Small Businesses, dated 5^th May, 2021.

[2] Ibid. 

[3] Framework 2.0 Introduced By RBI To Battle Stress Caused By Second Wave Of Covid-19, Mondaq, Published on 11^th May, 2021.