RBI panel seeks tighter norms for loan recast

Banks should set aside 5% of total assets for standard loans that are restructured, up from 2% currently, while provisions for loans that are already restructured should be increased to 5% in a phased manner over two years, the report said.

The RBI had set up a working group last October to review the guidelines on debt restructuring of loans by banks and financial institutions and suggest changes taking into account the best international practices and accounting standards.

Under corporate debt restructuring, banks ease payment terms for corporate borrowers by extending payment tenure, lowering rate of interest or converting debt into equity without classifying the loan as bad.

RBI's working group has suggested that conversion of debt into preference shares should be done as a last resort and only for listed companies, while classification of such loans as bad or non-performing will be considered after two years.

Lenders to Kingfisher Airlines are saddled with a fifth of the ailing carrier's stake after they converted part of the debt into equity as part of its loans restructuring.

Kingfisher shares have fallen below their face value, plunging more than 90% from their 2007 peak, forcing banks to book investment losses.

The report suggested the need for higher amount of "sacrifice" by controlling shareholders or promoters when large loan accounts are restructured.

"As stipulating personal guarantee will ensure promoters' 'skin in the game' or commitment to the restructuring package, obtaining the personal guarantee of promoters be made a mandatory requirement in all cases of restructuring," the report said.

It recommended that in cases where the approved restructuring package could not be implemented, banks should assess the situation early and use exit options with a view to minimising losses.

"The terms and conditions of restructuring should inherently contain the principle of carrot and stick," it said, explaining that while restructuring offers incentives for viable accounts, it should have disincentives for non-adherence to the terms of restructuring and under-performance.

Indian banks have drawn flak recently for turning to the Corporate Debt Restructuring Cell (CDR), an RBI-approved informal forum of bankers, to avoid classifying a loan as bad.

In the year to end-March, Indian banks sought to restructure a record USD 12 billion in corporate loans through CDR, an increase of 156% from the previous year.

This excludes billions of dollars in loans restructured outside the official channel, including USD 4 billion of Air India debt and about USD 5.5 billion of loans at loss-making state electricity boards.