Siemens Factoring Private Limited: RBI Resolution Framework 2.0 for COVID-19 Related Stress

1.1 Introduction:

The Reserve Bank of India announced “Resolution Framework for COVID-19-related Stress” (“Resolution Framework - 1.0”) on August 6, 2020 which provided a window to enable lenders to implement a resolution plan in respect of eligible exposures, while classifying such exposures as Standard, subject to specified conditions.

The resurgence of Covid-19 pandemic in India in the recent weeks and the consequent containment measures to check the spread of the pandemic may impact the recovery process. With the objective of alleviating the potential stress to individual borrowers, small businesses and Micro, Small and Medium Enterprises (MSMEs), a new set of measures have been announced by RBI. These measures are broadly in line with the contours of the Resolution Framework - 1.0, with suitable modifications.

These local guidelines have been formulated in line with the “Resolution Framework - 2.0: Resolution of Covid-19 related stress” announced by the RBI on May 5, 2021, under Notification no 31 dealing with individuals and small businesses, and Notification no 32 dealing with Micro, Small and Medium Enterprises (MSMEs). The guideline covers Resolution Framework for Individuals and Small Businesses in section 1.2 and for MSMEs in section 1.3.

1.2 Individuals and Small Businesses:

The following approach of SFPL shall be in line with the RBI Circular dated May 5, 2021 on “Resolution Framework - 2.0: Resolution of Covid-19 related stress of Individuals and Small Businesses”. In SFPL context, it is applicable for loans availed by individuals for business purposes and small businesses not resgistered as MSMEs. SFPL reserves its right for seeking any information from the borrower as may be required for the completion of this assesement.

Eligibility criteria for borrowers

• Individuals who have availed of financing for business purposes and to whom the lending institutions have aggregate exposure of not more than INR 500 Mio as on March 31, 2021
• Small businesses, including those engaged in retail and wholesale trade, other than those classified as micro, small and medium enterprises as on March 31, 2021 and to whom the lending institutions have aggregate exposure of not more than INR 500 Mio as on March 31, 2021
• Borrower account should not have availed of any resolution in terms of the Resolution Framework – 1.0
• Standard asset classification in SFPL books as on March 31, 2021
• No demonstration of credit weakness before the COVID disruption but have had cashflow stress during the COVID disruption, which now seems to having a lasting impact

Process of invocation of the Resolution Process

Resolution Process under this framework will be treated as invoked when SFPL and the borrower agree to proceed with the efforts towards finalizing a resolution plan to be implemented. Hence the process will be as follows:

• Borrower approaches SFPL with an application for invoking resolution process under this window. Invocation of restructuring happens when a request made by the borrower, for the purpose of restructuring, is accepted by SFPL.
• Post receipt of application from borrower, SFPL will review it in line with the RBI circular dated May 5, 2021 on Resolution Framework 2.0 and the Board approved policy. The decision to invoke resolution process under this window will be taken by SFPL / each lending institution having exposure to the borrower independent of invocation decisions taken by SFPL / other lending institutions, if any, having exposure to the same borrower
• The decision will be communicated to the borrower in writing within 30 days of receipt of an application.
• Resolution Plan should be finalized and implemented within 90 days from date of invocation of the resolution process under this window.
• Resolution Plan shall be deemed to be implemented only if all the following conditions are met:

1. all related documentation, including execution of necessary agreements between SFPL and borrower and collaterals provided, if any, are completed by SFPL in consonance with the resolution plan being implemented;
2. the changes in the terms of conditions of the debt get duly reflected in the books of SFPL; and,
3. borrower is not in default with SFPL as per the revised terms.

Timeline of events

• The last date of invocation of resolution permitted under this window is September 30, 2021.
• Resolution Plan should be finalized and implemented within 90 days from date of invocation of the resolution process under this window.

Permitted features of Resolution Plan

Resolution Plan may involve any action / plan / reorganization including, but not limited to:

• rescheduling of payments
• conversion of any interest accrued or to be accrued into another credit facility
• revisions in working capital sanction
• granting of moratorium for a maximum of 2 years from Resolution Plan implementation date
• extension of residual tenor with / without payment moratorium such that overall cap on extension of residual tenor, inclusive of moratorium period if any permitted, is two years
• conversion of a portion debt into instruments such as equity, debentures, etc.

In any case, compromise settlements are not permitted.

Asset Classification, Provisioning and Credit Information Reporting

• If Resolution Plan is implemented in adhereance to the conditions above, the asset classification of borrower account classified as Standard can be retained. Whereas, the borrower accounts which may have slipped into NPA category between April 1, 2021 and date of implementation may be upgraded to Standard as on date of implementation of Resolution Plan.
• In respect of borrowers where the resolution process has been invoked, SFPL may sanction additional finance even before implementation of the plan in order to meet the interim liquidity requirements of the borrower. This facility of additional finance may be classified as ‘Standard’ till implementation of the plan regardless of the actual performance of the borrower in the interim. However, if Resolution Plan is not implemented within the stipulated timelines, the asset classification of the additional finance will be as per the actual performance of the borrower with respect to such additional finance or performance of the rest of the credit facilities, whichever is worse.
• Provisioning will be done as per RBI laid norms for local books and it will be made as per COF guidelines for global book.
• For the purpose of credit reporting, the accounts shall be treated as restructured and shall consequently be governed by the respective policies of the credit information companies as applicable to accounts that are restructured.

Debt resolved previously under Resolution Framework – 1.0

• In cases wherein Resolution Plan had been implemented in term of the Resolution Framework – 1.0, and where the Resolution Plan had permitted no moratorium or moratorium of less than two years and / or extension of residual tenor by a period of less than two years, SFPL can use this window to modify such plans only to the extent of increasing the period of moratorium / extension of residual tenor subject to the caps. The overall caps on moratorium and / or extension of residual tenor granted under Resolution Framework – 1.0 and this framework combined, shall be two years. The timelines and process of implementation remains the same as mentioned for Resolution Framework – 2.0.
  

1.3       Micro, Small and Medium Enterprises

The following approach of SFPL shall be in line with the RBI Circular dated May 5, 2021 on “Resolution Framework 2.0 - Resolution of Covid-19 related stress of Micro, Small and Medium Enterprises (MSME)”. In SFPL context, it is applicable for businesses resgistered as MSMEs. SFPL reserves its right for seeking any information from the borrower as may be required for the completion of this assesement.

Eligibility criteria for borrowers

• Borrower should be classified as micro, small or medium enterprise as on March 31, 2021 in terms of the Gazette Notification S.O. 2119 (E) dated June 26, 2020

1. If the borrower is not registered in the Udyam Registration portal, such registration shall be required to be completed before the date of implementation of the restructuring plan for the plan to be treated as implemented.

• Borrower is GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs that are exempt from GST-registration. This shall be determined on the basis of exemption limit obtained as on March 31, 2021.
• Aggregate exposure (fund and non-fund based limits) with lending institutions of INR 500 Mio or less as on March 31, 2021
• Standard asset classification in SFPL’s books as on March 31, 2021
• Borrower’s account was not restructured in terms of MSME restructuring circulars by RBI dated 1 January 2019, 11 February 2020 and 6 August 2020 
• No demonstration of credit weakness before the COVID disruption but have had cashflow stress during the COVID disruption, which now seems to having a lasting impact

Process of invocation of the Resolution Process

Restructuring under this framework will be treated as invoked when SFPL and the borrower agree to proceed with the efforts towards finalizing a restructuring plan to be implemented. Hence the process will be as follows:

• Borrower approaches SFPL with an application for invoking restructuring under this window.
• SFPL reviews the application in line with the RBI circular dated May 5, 2021 on Resolution Framework 2.0 and the Board approved policy. The decision to invoke resolution process under this window will be taken by SFPL / each lending institution having exposure to the borrower independent of invocation decisions taken by SFPL / other lending institutions, if any, having exposure to the same borrower.
• The decision will be communicated to the borrower in writing within 30 days of receipt of an application.
• Restructuring Plan should be finalized and implemented within 90 days from date of invocation of the resolution process under this window.
• If the borrower is not registered in the Udyam Registration portal, such registration shall be required to be completed before the date of implementation of the restructuring plan for the plan to be treated as implemented.

Timeline of events

• The last date of invocation of resolution permitted under this window is September 30, 2021.
• Restructuring plan should be finalized and implemented within 90 days from date of invocation of the resolution process under this window.

Permitted features of Restructuring

This will be same as “Permitted features of Resolution Plan” mentioned for Individuals and Small Businesses.

Asset Classification, Provisioning and Credit Information Reporting

• If Restructuring Plan is implemented in adhereance to the conditions above, the asset classification of borrower account classified as Standard can be retained. Whereas, the borrower accounts which may have slipped into NPA category between April 1, 2021 and date of implementation may be upgraded to Standard as on date of implementation of Restructuring Plan.
• Provisioning will be done as per RBI laid norms for local books and it will be made as per COF guidelines for global book.
• For the purpose of credit reporting, the accounts shall be treated as restructured and shall consequently be governed by the respective policies of the credit information companies as applicable to accounts that are restructured.

Debt resolved previously under Resolution Framework – 1.0

No further extensions / resolutions are available under this framework for MSMEs.

1.4       Disclosure requirement

Disclosure requirements are as per the regulations and in the formats provided under notifications from RBI.

1.5       Grievance Redressal

If the complaint / dispute is not redressed by the sales manager, then within a period of 15 days from the last communication, the customer may approach the Nodal Grievance Redressal Officer of SFPL. Mr. Harsh Nangalia has been appointed as the Nodal Grievance Redressal Officer and can be reached at: sfs.compliance.in@siemens.com.