RBI increased the provision on new restructured standard loans to 5 percent with effect from June 1, 2013 as against the existing 2.75 percent. For the stock of same accounts as on March 31, 2013; it will be in a phased manner by March 31, 2016. Standard loan accounts cannot retain its standard status after restructuring from April 1, 2015.
In line with international banking practices, the Reserve Bank of India (RBI) tightened norms for bank loan restructuring following recommendations by B Mahapatra Working Committee.
The central bank increased the provision on new restructured standard loans to 5 percent with effect from June 1, 2013 as against the existing 2.75 percent. For the stock of same accounts as on March 31, 2013; it will be however, in a phased manner to scale up to 5 percent level by March 31, 2016.
At the same time, RBI mandated, the standard loan accounts cannot retain its standard status after restructuring effective from April 1, 2015.
When the borrower faces financial stress and cannot repay loans, it asks for relaxation of original terms and conditions. Banks then ease certain terms like reduction of interest rates, moratorium on interest repayment and so on. In banking parlance, it is called restructuring.
Standard assets mean performing assets. In anticipation of future default, a standard loan account can always be referred for recast.
"The extant asset classification benefits available on restructuring on fulfilling certain conditions will be withdrawn for all restructurings effective from April 1, 2015 with the exception of provisions related to changes in the date of commence of commercial operation (DCCO) in respect of infrastructure as well as non-infrastructure project loans," RBI said in a notification issued on Thursday.
This means, a standard asset on restructuring would be immediately classified as sub-standard as also non-performing assets. Any recast will push the loan account into further lower category unlike the existing norms wherein standard loans are allowed to retain their status on restructuring. Non-performing accounts too are currently allowed not to deteriorate further in asset classification, which are generally of four types: standard, sub-standard, doubtful and bad assets.
"These are prudent level of provisioning and expected to bring in more transparency," Ananda Bhoumik - director (Banking) at India Ratings (domestic arm of Fitch Ratings) told moneycontrol.com.
"Though credit costs will rise for banks but such measures will strengthen their balance sheet. By 2015, the economy is also expected recover and volumes of restructured loans would also come down. The mandate to increase provision in a phased manner will protect banks from taking one-time hit in their profit margins," he said.
RBI asked banks to provide at 3.50 percent with effect from March 31, 2014; spread over four quarters of the financial year. The rate of provision will increase to 4.25 percent in the similar manner next year. Finally, banks will have to provide at 5 percent for those old restructured loans with effect from March 31, 2016.
Had these measures introduced between 2007 and 2010, the return on asset (RoA), a measure of profitability, then pegged at 1 percent for the entire banking industry, would have come down to around 0.80 percent, showed a study by India Ratings.
"All restructured accounts which have been classified as non-performing assets upon restructuring, would be eligible for upgradation to the standard category after observation of 'satisfactory performance' during the 'specified period'," RBI added.
With this new norms of restructuring, promoters personal guarantee is now a mandatory for any restructured loans. Corporate guarantee will not be considered substitute for any personal guarantee now on.
RBI has decided that promoters of companies going for restructuring, would have to bring in more share for the scheme of restructuring. They now have to bring in 20 percent of the erosion of the net present value compared with the 15 percent earlier.