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By taking working capital and not a term loan, a stressed account can escape being classified as a restructured account. Photo: Aniruddha Chowdhury/Mint
By taking working capital and not a term loan, a stressed account can escape being classified as a restructured account. Photo: Aniruddha Chowdhury/Mint

RBI clamps down on long term working capital loans

The Reserve Bank of India has told banks not to clear long-term credit in the garb of working capital loans of up to 10 years to stressed accounts

Mumbai: The Reserve Bank of India (RBI) has asked banks to avoid approving long-term credit for periods up to 10 years under the garb of working capital loans to stressed companies, two bankers in the know said.

As the name suggests, working capital loans are typically given for short periods to cater to day-to-day cash requirements.

But, banks have been found, in some stressed cases, to be approving working capital loans for tenors as long as 10 years. By taking working capital and not a term loan, a stressed account can escape being classified as a restructured account.

RBI has now clamped down on this.

In an internal advisory to lenders in January, the central bank said that any additional working capital financing approved under the rectification scheme by the joint lender forum (JLF) cannot exceed a term longer than 6-8 months. If it does, it is tantamount to restructuring of the loan.

“It is pretty common for banks to approve long-term loans as part of working capital, as there is a long-term component in all these loans. Here, the RBI’s objection was against clearing it for stressed cases where rectification has been invoked," said a senior public sector banker on condition of anonymity as he is not permitted to speak to the press.

While usually such working capital loans are cleared for up to three years, the tenure may increase significantly, depending on the stress in the company and the ability of the underlying business to repay the loans.

An email query sent to RBI on 27 April remained unanswered till the time of going to press.

As per the regulatory framework for management of stressed assets approved by the RBI back in 2014, banks are allowed to work towards resolving stress in three ways—rectification, restructuring and recovery.

Under rectification, lenders typically take a commitment from the borrower on how it plans to turn around the asset and may even choose to approve additional financing without it being called restructuring.

RBI has now clarified that this additional financing can only be short-term working capital. This holds true for both large corporates and micro, small and medium enterprises (MSMEs).

In a notification dated 17 March, the RBI asked banks to ensure that additional financing under rectification of MSMEs may only be for meeting, in exceptional cases, unavoidable increased working capital requirement.

The central bank also stated that such additional financing should be an ad hoc facility to be repaid or regularized within a maximum period of six months.

Additional finance for any other purpose, as also any roll-over of existing facilities, or funding not in compliance with the above conditions, will be tantamount to restructuring, the regulator said in its notification for MSME cases.

“Typically, in corporate debt restructuring (CDR) cases where the companies have exhausted their working capital loans to retire their term loans, banks approve long-term financing for their working capital needs. This practice was being carried on for companies under rectification, too," said a second public sector banker also speaking on condition of anonymity.

In the wake of the advisory from the RBI, lenders were not able to clear long-term working capital loans to Amtek Auto Ltd, which has been facing tight liquidity conditions, the two bankers confirmed.

In August last year, Amtek Auto, which makes ancillary parts for vehicles, had stated that it was facing some temporary mismatches in its cash flow.

Later in November, it appointed Morgan Stanley as advisor to assist in its debt-reduction plan. The firm had said it was considering various options, including the sale of up to a 25-40% stake in its overseas business. None of these plans has fructified.

Calls and text messages to Gautam Malhotra, managing director at Amtek India, remained unanswered.

Experts say that banks offering loans as part of a rectification process is wrong.

“Under rectification, generally, the borrower will either infuse equity through new or existing investors or refinance existing liabilities to avert a default. If there is a change in the repayment schedule, this is a restructuring of the loan," said Nikhil Shah, managing director, Alvarez and Marsal (India), a stressed asset turnaround firm.

The regulator has become strict with lenders to ensure that they follow stressed asset rules not just in letter but also in spirit.

In December, RBI conducted its asset quality review (AQR), looking at the repayment record of some companies over the last few years to see if they deserve higher provisioning.

Following this, individual banks were given a list of companies where loan exposures needed to be provided for over the third and fourth quarter of fiscal 2016.

The process led to a significant hit on bank balance sheets, where a large number of state-owned banks reported losses, while private sector banks too showed a drop in profitability.

Gross bad loans across India’s 39 listed banks surged to 4.38 trillion for the quarter ended 31 December from 3.4 trillion at the end of September, shows data collated by Capitaline, a financial database.

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