RBI makes loan recasts difficult for firms, banks | Mint
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Business News/ Industry / Banking/  RBI makes loan recasts difficult for firms, banks

RBI makes loan recasts difficult for firms, banks

RBI says banks should set aside more money, promoters have to be liable for compensation for losses lenders incur

RBI’s move reflects the concern of the central bank over debt recasts, already at `2.29 trillion in March and likely to surge further in the context of a sluggish economy. Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint)Premium
RBI’s move reflects the concern of the central bank over debt recasts, already at `2.29 trillion in March and likely to surge further in the context of a sluggish economy. Photo: Pradeep Gaur/Mint
(Pradeep Gaur/Mint)

Mumbai: The Reserve Bank of India (RBI) tightened the rules for corporate debt recasts on Thursday, seeking to address the risk of restructured loans turning bad as the economy struggles for recovery from its slowest pace of growth in a decade.

Banks should set aside more money to cover restructured loans and the promoters of companies seeking a debt recast have to be made personally liable for compensation for losses incurred by lenders engaged in such an exercise, RBI said.

The move reflects the concern of the central bank over debt recasts, already at 2.29 trillion in March and likely to surge further in the context of a sluggish economy, putting the earnings of overburdened state-owned lenders even more at risk. It also echoes the concerns expressed by finance minister P. Chidambaram earlier this year.

Slowing economic growth, which is estimated to have slumped to a decade’s low of 5% in the year ended 31 March, and high borrowing costs have impaired the ability of many borrowers to repay loans, causing them to seek debt recasts.

The new RBI requirements are part of the final guidelines for restructuring loans released by the central bank, based on the report of an RBI committee headed by executive director B. Mahapatra. The draft report was released in January.

The guidelines make it difficult for company promoters to exploit the corporate debt restructuring (CDR) mechanism offered by banks. Among other things, the guidelines rule out any kind of corporate guarantee; banks will be required to insist on a personal guarantee of the promoters.

“It has 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," RBI said.

The rule can be relaxed only in cases where the promoters of a company are not individuals, but other corporate bodies, or where the individual promoters cannot be clearly identified.

Promoters must also bring in a minimum of 20% of the loan amount that a bank will forego in such a recast, or 2% of the total restructured debt, whichever is higher, in all recast cases.

“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. Further, such higher sacrifice may invariably be insisted upon in larger accounts, especially CDR accounts," RBI said.

CDR is a platform where banks recast debt if 80% of the creditors, in value, agree to do so. It involves stretching the period of repayment, paring borrowing rates, and even replacing rupee loans with dollar loans.

Chidambaram had said in March that banks need to crack down on rising bad loans, albeit without hurting industry. He said they should also ensure that wealthy promoters bring funds into their companies and pay back loans.

“While we understand why NPAs (non-performing assets) have risen and the restructured accounts have risen, we also wish the banks to take strong steps to recover their dues," he had said at the time. “I think the promoters have aduty to bring in additional money and the companies have a duty to pay their dues to banks. We cannot have an affluent promoter and a sick company."

RBI’s biannual Financial Stability Report has expressed concerns on the pace of restructuring in the banking industry. In the report, published in December, RBI criticized banks for a 40% rise in restructured assets in a year when credit growth was only 20%.

The tougher norms on promoters’ contribution will ensure promoters’ “skin in the game" or commitment to the restructuring package, RBI said.

The working group had originally suggested 15% of the erosion in fair value, or 2% of the debt value for the recast, whichever is higher. The draft had also suggested giving time to the promoters for raising the money and said their contribution could be brought in two phases. The final guidelines said the promoters’ contribution should “invariably be brought upfront".

RBI said the increase in provisions for restructured loans from an existing 2.75% to 5% (of the value of loans) must be made in a phased manner till 31 March 2016, from March 2015 suggested in the draft. If that gives banks a little relief, they will not be rejoicing, as RBI also tightened the norms on loan classification.

The central bank said restructured accounts can no longer be classified as “standard" accounts unless principal and interest on all facilities in the account are serviced one year from the commencement of the first payment of interest or principal, whichever comes later.

“This means that restructured loans, unless it meets the criteria, will be classified as substandard, increasing the provision on such loans to 15% from 5% currently," said A. Krishna Kumar, managing director of the country’s largest lender, State Bank of India.

“Getting the promoter to put more money will help banks because it will mean that they can no longer escape and banks can invoke the guarantee," Krishna Kumar said.

Banks will now have to increase the provisions to 3.5% with effect from 31 March 2014 and 4.25% with effect from 31 March 2015. One year after that, effective 31 March 2016, all provisions on restructured loans should be 5%.

The draft report had originally suggested a rise in provisions to 3.75% with effect from 31 March 2014, and 5% with effect from 31 March 2015.

For all new restructured loans though, the provision increases to 5% of the loan amount, effective 1 June, same as the draft.

“Delaying the increase in restructured loan provisions by another year is just a marginal relief for banks because they will still have to provide 5% provisioning on incremental restructured assets starting April," said Dipankar Choudhury, an independent analyst.

“Increasing the promoter share in restructuring was long overdue because this had been misused by promoters all along. Invoking personal guarantees is also needed in India because most companies are promoter-driven and a corporate guarantee allows promoters to put their hand up in times of stress," he said.

Total loans restructured by Indian banks under the CDR route stood at 2.29 trillion in March. Analysts estimate that about 50% of the total restructuring done in the industry is through CDR and the rest through bilateral discussions between the borrowers and the banks.

The guidelines also accepted the Mahapatra panel’s recommendation that conversion of debt into preference shares should be done only as a last resort and such conversion of debt into equity/preference shares should, in any case, be restricted. The conversion is allowed for only listed firms.

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Published: 30 May 2013, 11:29 PM IST
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