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Photo: Mint
Photo: Mint

Lessons learnt, regulator bulletproofs loan scheme

  • RBI puts in place safeguards to prevent misuse of debt restructuring plan
  • All resolution plans of 1,500 crore and more will have to be vetted by an expert panel

MUMBAI : There are lessons from the past that the Reserve Bank of India (RBI) seems to have taken into consideration before announcing the one-time debt restructuring scheme for stressed companies in the wake of the covid-19 crisis. In fact, this time round, it has decided to put in place several additional safeguards, including the setting up of an expert committee headed by veteran banker K. V. Kamath to suggest financial parameters that must be factored into the resolution plans.

“The parameters shall inter alia cover aspects related to leverage, liquidity and debt serviceability," it said, adding that all resolution plans of 1,500 crore and more have to be vetted by the expert panel.

The RBI also mandated all lenders to sign inter-creditor agreements (ICAs), and said there will be penal provisions of 20% for those not doing so. Besides, for resolution plans where the aggregate exposure of the lending institution is 100 crore or more, an independent credit evaluation will be mandated by a credit rating agency (CRA), it added.

“In the light of past experience with regard to use of regulatory forbearance, necessary safeguards have been incorporated, including prudent entry norms, clearly defined boundary conditions, specific binding covenants, independent validation and strict post-implementation performance monitoring. The underlying theme of this resolution window is preservation of the soundness of the Indian banking sector," said RBI governor Shaktikanta Das.

In May, Mint had reported that bankers were expecting RBI to have safeguards such as a monitoring mechanism so that lenders use some discretion while restructuring loans. The measures will help avoid repeating the mistakes witnessed under the corporate debt restructuring (CDR) scheme, which was wound up in 2018, 17 years after it came into existence. While the cell had approved debt recast of 4 trillion, only 84,677 crore of loans saw a turnaround.

When the CDR cell was active, banks had to set aside only 5% as provisions. Under the new framework, banks will have to maintain 10% as provisions. Lenders had requested the RBI to allow debt recast of stressed companies without classifying the account as non-performing, and setting aside 15% of the loan as provisions. Banks have to set aside 0.4-1% of all standard loans as provisions, which increase manifold once it turns bad.

The conditions for reversal of the provisions have also been tightened—while half of the provisions will be reversed on receiving 20%, the other half will be done on receiving another 10% repayment. Besides, to force large borrowers to pay regularly as per the revised terms, the RBI has set a 30-day default window for loans to be considered as NPAs during the monitoring period.

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