RBI issues draft guidelines on restructuring loans
The Reserve Bank of India (RBI) on Thursday proposed to allow lenders to retain the standard asset status of their loan accounts even after restructuring. However, this norm is subject to some conditions and will be applicable till April 1, 2015.
The Reserve Bank of India (RBI) on Thursday proposed to allow lenders to retain the standard asset status of their loan accounts even after restructuring. However, this norm is subject to some conditions and will be applicable till April 1, 2015. Till that time, banks are required to raise their provisions on such assets to 5% in a staggered manner; the central bank said in its draft guidelines on restructuring assets released late evening on Thursday.
"RBI has decided to accept the above recommendation and give effect to this with effect from April 1, 2015. Accordingly, the extant asset classification benefits available on restructuring on fulfilling certain conditions will be withdrawn from that date," said the draft guidelines.
Earlier in July, 2012, a working group headed by B Mahapatra had reviewed the existing prudential guidelines on restructuring of loans by banks and it was put up for comments from external parties.
A loan accounts is considered for restructuring when the business faces any stress in repaying its debt. After restructuring, if it loses its standard (performing asset status), it slips into sub-standard category, the first level of non-performing assets that require higher provisions. The measure is a kind of temporary relief for banks till the stipulated time.
The panel later recommended some modifications after getting feedback from various quarters. Based on those, RBI issued the draft guidelines inviting further comments to be submitted on and before February 28, 2013.
Banks can avail this asset classification benefits if there is any change of date of commencement of commercial operations for infrastructure projects. Restructuring is the process when banks relaxes the original terms and conditions of loan repayments.
According to the draft guidelines, till the time of April 1, 2015; banks need to up its provisions from the existing 2.75% to 3.75% spread over four quarters in 2013-14 and then to 5% in the same manner by March 31, 2015.
Upgradation on principal and interest payments both
As per Mahapatra committee, loan accounts which already lost their standard status due to restructuring would be eligible upgrade to their earlier status only after observation of "satisfactory performance" during the "specified period".
"It has been decided that the specified period should be redefined as a period of one year from the commencement of the first payment of interest or principal, whichever is later, on the credit facility with longest period of moratorium under the terms of restructuring package," said the RBI draft guidelines adding that in many cases, accounts are upgraded on the basis of interest repayment only.
Only viable restructuring...
Banks just cannot take any feeble business unit for restructuring. Viability of restructuring has to be established based on certain proposed parameters by RBI. Those include return on capital employed, debt service coverage ratio, gap between the internal rate of return (IRR) and cost of funds and the amount of provision required in lieu of the decrease in the fair value of the restructured loans.
"In line with the (panel) recommendation, it has been decided that in order to qualify for the special asset classification benefit banks should ensure that the unit taken up for restructuring achieves viability in eight years (instead of 10 earlier), if it is engaged in infrastructure activities, and in five years (seven earlier) in other cases," RBI added further.
In any restructuring scheme, as per the exiting norms, promoter(s) should pump in a minimum of 15% of banks' sacrifice due to the recast. Under such regulation, banks can only claim retention of standard category after restructuring.
"Promoters' sacrifice and additional funds brought by them should be a minimum of 15% of banks' sacrifice or 2% of the restructured debt, whichever is higher. This stipulation is the minimum and banks may decide on a higher sacrifice by promoters depending on the riskiness of the project and promoters' ability to bring in higher sacrifice amount," RBI said referring to the panel proposals.
The draft guidelines also advocated for promoters' personal guarantee in all cases of restructuring. Banks need to have it mandatorily to avail asset classification benefits.
In 2012, Indian banks restructured Rs 2.12 lakh crore loans under the corporate debt restructuring (CDR), a mutual platform to recast debt. Higher provisions against bad loans are eroding banks' profit margins.