Bank loans turning bad along with the ups and downs of the business cycle is well known. In many cases, debt restructuring becomes inevitable. But in the last fiscal, corporate debt restructuring (CDR) assumed alarming proportions: loans amounting to $12 billion were restructured.
On Friday, a Reserve Bank of India (RBI) working group recommended tightening the norms to be followed by banks for CDR. Among other things, a case has been made for a higher amount of promoters’ sacrifice in large CDRs, and conversion of debt into preference shares only as a measure of last resort—unlike now when banks willingly agree to such measures.
At the moment, these are mere recommendations and it is quite possible that the majority shareholder of public sector banks, the government, may shoot them down. For the sake of banks’ health, it should not do so.