RBI tightens loan restructuring norms; raises provision to 5%

 Worried over rising NPA, the Reserve Bank today tightened rules forrestructuring of most types of loans in line with global practices. 

As per the latest RBI notification, provisioning on the newly restructured account has been raised to 5 per cent from June 1 from 2 per cent now. However, for the old restructured account it will be done in the phased manner. 

The Reserve Bank also said that existing "regulatory forbearance" will no longer be available from April 1, 2015. 

"...it is clarified that no such incentive would be available on withdrawal of regulatory forbearance on restructuring with effect from April 1, 2015, except in cases of restructuring by change of DCCO (date of commencement of commercial operation) of infrastructure and non-infrastructure project loans as specified in this circular," RBI said. 

As per existing guidelines, an account after restructuring is not classified as non-performing assets (NPA). However, as per the new norms, restructured account would be treated as NPA. 

"This may be made applicable with immediate effect in cases of new restructuring but in a phased manner during a two year period for the existing standard restructured accounts," it added. 

As a result, the banks will have to do higher provision which will have negative impact bottom lines. 

Banks are also advised that they should correctly capture the reduction in fair value of restructured accounts as it will have a bearing not only on the provisioning required to be made by them but also on the amount of sacrifice required from the promoters, it said. 

Further, it said, "there should not be any effort on the part of banks to artificially reduce the net present value of cash flows by resorting to any sort of financial engineering." 

Banks are also advised to put in place a proper mechanism of checks and balances to ensure accurate calculation of erosion in the fair value of restructured accounts, it added. 

RBI said it has been decided that banks should ensure that the unit taken up for restructuring achieves viability in 8 years, if it is engaged in infrastructure activities, and in 5 years in other cases. 

It has also been decided that the incentive for quick implementation of the restructuring package in non-CDR (corporate debt restructuring) cases would henceforth be available, if the approved package is implemented by the bank within 120 days from the date of receipt of application. 

There is no change in the time period as regards CDR mechanism, it added. 

At present, asset classification benefit is available in case the restructuring package gets implemented within 90 days from the date of receipt of application non-CDR restructuring. 

It has been decided that promoters' sacrifice and additional funds brought by them should be minimum of 20 per cent of banks' sacrifice or 2 per cent of the restructured debt, whichever is higher, it said. 

"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," it said.

Further, it said such higher sacrifice may invariably be insisted upon in larger accounts, especially CDR accounts. The promoters' sacrifice should invariably be brought upfront while extending therestructuring benefits to the borrowers. 

It has also been decided that promoters' personal guarantee should be obtained in all cases of restructuring and corporate guarantee cannot be accepted as a substitute for personal guarantee. 

However, it said, corporate guarantee can be accepted in those cases where the promoters of a company are not individuals but other corporate bodies or where the individual promoters cannot be clearly identified. 

RBI has allowed banks to convert debt into preference shares but it should be done only as a last resort. 

Such conversion of debt into equity/preference shares should, in any case, be restricted to a cap say 10 per cent of the restructured debt, it said. 

Any conversion of debt into equity should be done only in the case of listed companies, it added.

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