In
my last blog on “Red Flagged Accounts”, I had mentioned some banks having large
proportion of stressed accounts which contain non-performing and restructured
assets. Restructuring of credit account means change in the structure of the
account and the basic objective is to preserve
economic value of the unit. Debt restructuring is a process that allows
a borrower facing cash flow problems and financial distress, to reduce and
renegotiate its delinquent debts in order to improve or restore liquidity and
rehabilitate so that it can continue its operations.
In
its master circular on 'Prudential Norms on Income Recognition, Asset
Classification and Provisioning pertaining to Advances', RBI has exhaustively
given guidelines for restructuring of advances which are applicable for
industrial units -outside or within Corporate Debt Restructuring mechanism; Small & Medium
Enterprises; and all other advances.
Banks
can restructure all accounts whether 'standard', 'sub-standard' or 'doubtful' but not with retrospective effect. Restructuring
of accounts cannot be taken up unless financial viability of unit is
established which is based upon certain viability benchmarks such as Return on
Capital Employed, Debt Service Coverage Ratio, Internal Rate of Return, Cost of
Funds and the amount of provision required in lieu of the diminution in fair
value of the restructured advance. Any
restructuring done without looking into cash flows of the borrower and
assessing viability of the projects/activity financed by the banks would be
treated as an attempt at ever greening a weak credit facility. Similarly fraud, malfeasant and wilful defaulter's account are also not eligible for
restructuring.
Certain
tenets of restructuring have been prescribed by RBI;-
1. Dues
to the bank should be fully secured by tangible securities (primary + collateral)
except i) MSE borrowers where outstanding is up to Rs 25 lacs and ii)
Infrastructure Projects, provided cash flows generated from the project is
adequate for repayment of loan and the financing bank has a clear and legal
first claim on these cash flows.
2. Unit
should be viable in 8 years in case of infrastructure activities and in 5 years
in case of other units.
3. Repayment
period including moratorium should not exceed 15 years in case of
infrastructure and 10 years in case of other advances.
4. Promoter's
contribution/ additional fund infusion should be minimum of 20% of bank's
sacrifice, i.e., diminution in fair value of advance or 2% of the restructured
debt whichever is higher. Such contribution/ fund infusion should invariably be
brought upfront and can be brought in the form of cash, de-rating of equity,
conversion of unsecured loan brought in by promoters in to equity and interest
free loan.
Upon
restructuring, 'standard assets' will immediately be classified as
'sub-standard asset'; and 'sub-standard' & 'doubtful assets' will slip into
further lower asset classification. These will be upgraded only when principal
and interest on all facilities in the account are serviced as per terms of
repayment during the period specified under restructuring package.
Reduction
in rate of interest and/or rescheduling repayment of principal amount, as part of
restructuring, will result in diminution in the fair value of the advance. Such
diminution in value is an economic loss for the bank and will have impact on
bank's market value of equity. Therefore, banks are required to measure such
diminution in fair value of the advance and make provisions for it by debit to
Profit & Loss Account.
All
the above framework sounds so soothing and sweet as if everything is going to be overboard
and transparent. During the last few years, especially the last year, banks and
the borrowers had resorted to restructuring
which was totally out of proportion. The reasons may be different. It may be
Reserve Bank of India had provided incentive on asset classification for quick
implementation of the restructuring package till 31st March, 2015 (except for a
few sectors such as consumer & personal loans, Capital market exposures and
Commercial real estate exposure). It
means, as per extant guidelines of RBI, upon restructuring, a 'standard'
account are degraded to 'substandard'
category and an existing NPA to degrade one notch further; but, as an
incentive for quick implementation, these guidelines were not applicable till 31st March, 2015. As such, this
special incentive will not be available from 01st April, 2015 onward.
Banks had taken advantage of this incentive so as not to over burden their balance sheet with non-performing assets; and the borrowers had also taken advantage of this weakness of banks. In the process, healthy units projected themselves as weak and usurped concessions from banks whereas sick but unviable units were also able to snatch further funds from their lenders. Ultimately, it is banks that are losers. Good money has gone to undeserving hands or was thrown on bad money.
Banks had taken advantage of this incentive so as not to over burden their balance sheet with non-performing assets; and the borrowers had also taken advantage of this weakness of banks. In the process, healthy units projected themselves as weak and usurped concessions from banks whereas sick but unviable units were also able to snatch further funds from their lenders. Ultimately, it is banks that are losers. Good money has gone to undeserving hands or was thrown on bad money.
Tilak Gulati
Assistant General Manager
UCO Bank
Publish your comments.
For queries respond : itstrgulati@gmail.com
Publish your comments.
For queries respond : itstrgulati@gmail.com
Gulatiji
ReplyDeletePlease keep up the good job you have been doing by writing the articles on Credit Monitoring which would be of immense help for our Colleagues in dealing with environment full of stress both inside and outside bank.
N R Kulkarni
AGM
UCO Bank
Kolkata