RBI norms to make parties in CDR responsible: OBC

According to the draft restructuring norms released by the RBI, there is a steep rise in provisioning that has been proposed for loan restructuring to 5 percent versus 2.75 percent earlier and the restructured loans will not be considered standard loans after 2015 so that as well has been proposed.

SL Bansal, chairman and managing director Oriental Bank of Commerce (OBC) explains, on CNBC-TV18, that the guidelines will significantly safeguard banks and restore an element of responsibility in the process of debt-restructuring.

Below is an edited transcript of the interview on CNBC-TV18

Q: What is your view on these draft norms and overall, do you see the proposed guidelines being in the right direction for the industry as a whole?

A: Absolutely. The guidelines are on the right track because of two-to-three factors. One, the RBI has observed of late that the increased and unbridled restructuring of debt across industry. The RBI has issued the norms to induce an element of responsibility in the restructuring process. The central bank has cautioned banks and strengthened the restructuring mechanism by mandating the borrower to put in more money.

Now the borrower has to offer 15 percent of the loss or 2 percent of the overall restructured book upfront and provide a guarantee. The bank has to look at the process of restructuring more seriously and have to provide 2.75 percent as on date. Slowly this 2.75 percent will move to 5 percent in two-years' time. From April 1, 2015 all assets will be straightaway downgraded to 'substandard' category mandating a provisioning of 15 percent.

Then there is a regulatory forbearance that these assets must have continued to remain in the 'substandard' category. Banks will also have to look into the assets based on securities available or may be included in the losses too.

The RBI wants the parties involved in the restructuring process to act responsibly and with concern. The promoter should evaluate all options before applying for restructuring and the banks should follow the mandated guidelines before agreeing to the restructuring of the asset. Of course, the profitability at banks will take a hit in the near and long-term.

Q: The RBI wants to deter shallow restructuring but these are as of now only the proposed guidelines. Do you foresee any change between this vis-à-vis the final guidelines?

A: I don’t think so. These are almost the final guidelines because RBI has already taken the view of various stake-holders. To me it appears that these guidelines are almost final. There may be some relaxation in the timeframe but otherwise this 5 percent was in the offing for last one year.

Now the RBI  have spelt out the timeframe within which the level of 5 percent is to be reached. But again from April 1, 2013 any fresh restructuring will straightaway attract 5 percent. To that extent, the RBI may allow some time but I have my own doubts. I think RBI would like to be very strict on these things.

Q: Is this only for incremental restructuring or existing restructured loans as well?

A: Incremental restructuring will straightaway attract 5 percent on all those assets which are restructured after April 1, 2013. But existing restructuring loans will be require a provisioning of 2.75 percent as on date. From April 1, 2013 to March 31, 2014 this 2.75 percent will be increased to 3.75 percent and from there to 5 percent by March 31, 2015. From April 1, 2015 it may be move to NPA category.

Q: Since the fresh incremental restructuring from April 1, 2013 will directly require provisioning of 5 percent, will this make the banking industry extremely wary of credit growth which is low? Do you see these provisions being more onerous and further curtail lending?

A: No. Both these processes are not related. Lending is a different process where banks will be cautious. Cash flow-based lending will replace smaller loans or collateralised lending. Though this will put some pressure on profitability, but in the long-term it is good for the industry.

Q: What is your opinion on infrastructure being excluded from these norms? How much of your restructured book is exposed to the infrastructure sector and what percentage does it comprise?

A: As on date, our restructured book is not substantially exposed to infrastructure projects. But regarding infrastructure projects neither the promoters nor the banks are at fault. Since only a few regulatory clearances are required, the RBI decided to let these assets continue to enjoy regulatory forbearances and allow the COD to be deferred.

These will not be covered in the 'straightaway downgrading' of the asset quality from April 1, 2015. Ultimately, the government of India and various regulatory bodies have to be brought on board to issue one single clearance. Then this exemption will also not be available going forward.

Q: The RBI guidelines are also looking to enhance promoter-contribution as well as personal guarantees. Do you think what is proposed is sufficient because there have been many cases of promoter-indifference?

A: Mandating the provision of 2 percent of the overall debt or 15 percent of whatever sacrifice is proposed in the restructured portfolio is fair enough. And since a personal guarantee has also been stipulated I think this is sufficient.

Q: When do you see the final guidelines being announced? Will you adhere to the norms immediately?

A: The guidelines will be applicable from April 1, 2013 and implemented in June 2013. So the RBI, to my mind, will finalise the guidelines within the next 45 days.