RBI/2012-13/
DBOD.BP.BC.No. /21.04.132/2012-13
DBOD.BP.BC.No. /21.04.132/2012-13
January 31, 2013
All Scheduled Commercial Banks (excluding RRBs)
Dear Sir,
Review of Prudential Guidelines on Restructuring of Advances by Banks and
Financial Institutions – Draft Guidelines
Financial Institutions – Draft Guidelines
Please refer to paragraphs 90 to 92 (extract enclosed)
of the Second Quarter Review of Monetary Policy 2012-13 announced on
October 30, 2012, wherein it was indicated that the draft guidelines on
‘Review of Prudential Guidelines on Restructuring of Advances by Banks
and Financial Institutions’ in the light of the recommendations of the
Working Group (WG) to Review the existing Prudential Guidelines on
Restructuring of Advances (Chairman: Shri B. Mahapatra) will be issued
by end-January 2013.
2. Accordingly, certain provisions of the existing guidelines contained in our circular DBOD.BP.BC.No.37/21.04.132/2008-09 dated August 27, 2008
and subsequent circulars issued on the subject have been revised and
draft guidelines enumerating the existing instructions,
recommendation(s) of the WG in that regard, and the proposed revised
instruction(s) are given in the Annex.
3. Comments on the draft guidelines may please
be emailed or sent to the Chief General Manager-in-Charge, Department
of Banking Operations and Development, Reserve Bank of India, Central
Office, Mumbai 400 001 on or before February 28, 2013.
Yours faithfully,(Deepak Singhal)
Chief General Manager-in-Charge
Encls: as above.
Extract from Second Quarter Review of Monetary Policy 2012-13
90. As indicated in the Monetary Policy
Statement of April 2012, a Working Group (Chairman: Shri B. Mahapatra)
reviewed the existing prudential guidelines on restructuring of
advances by banks/financial institutions. The report of the Working
Group was submitted in July and was placed on the website of the
Reserve Bank inviting comments from the stakeholders.
91. The recommendations of the Working Group as
also the comments/suggestions received in this regard are under
examination and draft guidelines will be issued by end-January 2013. As
an immediate measure, it has been decided to:
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increase the provision for restructured standard accounts from the existing 2.0 per cent to 2.75 per cent.
Prudential Guidelines on Restructuring of Advances by Banks and Financial Institutions
1. Doing Away with Regulatory Forbearance
1.1 Existing guidelines in terms of paragraph
14.2 of the Master Circular on ‘Prudential Norms on Income Recognition,
Asset Classification and Provisioning pertaining to Advances’ dated
July 2, 2012 (MC on IRAC Norms) allow regulatory forbearance on asset
classification of restructured accounts subject to certain conditions,
i.e. standard accounts are allowed to retain their asset classification
and NPA accounts are allowed to not deteriorate further in asset
classification on restructuring.
1.2 In terms of paragraph 4.2.15.3 of MC on IRAC
Norms dated July 2, 2012, asset classification benefit is also
available on change of date of commencement of commercial operation
(DCCO) for projects under infrastructure sector.
1.3 The WG recommended that the RBI may do away
with the regulatory forbearance regarding asset classification,
provisioning and capital adequacy on restructuring of loan and advances
in line with the international prudential measures. However, in view
of the current domestic macroeconomic situation as also global
situation, this measure could be considered say, after a period of two
years. Nevertheless, the WG felt that extant asset classification
benefits in cases of change of DCCO of infrastructure project loans may
be allowed to continue for some more time in view of the uncertainties
involved in obtaining clearances from various authorities and
importance of the sector in national growth and development.
1.4 RBI has decided to accept the above
recommendation and give effect to this with effect from April 1, 2015.
Accordingly, the extant asset classification benefits available on
restructuring on fulfilling certain conditions will be withdrawn from
that date. It implies that a standard account on restructuring would be
immediately classified as sub-standard on restructuring as also the
non-performing assets, upon restructuring, would continue to have the
same asset classification as prior to restructuring and slip into
further lower asset classification categories as per the extant asset
classification norms with reference to the pre-restructuring repayment
schedule.
1.5 However, in accordance with the
recommendation of the WG for continuing the extant asset classification
benefit in cases of infrastructure projects on change of DCCO for some
more time, such asset classification benefit would continue to be
available in cases of infrastructure projects beyond April 1, 2015 till
further review by RBI.
2. General Provision on Restructured Standard Accounts
2.1 In terms of circular DBOD.No.BP.BC.94/21.04.048/2011-12dated May 18, 2011,
banks are required to make a provision of 2.00 per cent on
restructured standard accounts for different periods depending on the
way an account is classified as restructured standard account, i.e.
either abinitio or on upgradation or on retention of asset
classification due to change in DCCO of infrastructure and
non-infrastructure projects.
2.2 Till such time the regulatory
forbearance on asset classification is dispensed with, in order to
prudently recognise the inherent risks in restructured standard assets
in the interregnum, the WG had recommended that the provision
requirement on such accounts should be increased from the present 2 per
cent to 5 per cent. This may be made applicable with immediate effect
in cases of new restructurings (flow) but in a phased manner during a
two year period for the existing standard restructured accounts
(stock).
2.3 As an immediate measure, the RBI increased
the provision on restructured standard accounts to 2.75 per cent from
2.00 per cent vide circular DBOD.No.BP.BC.63/21.04.048/2012-13dated November 26, 2012.
It has now been decided to increase the provision to 5 per cent in
respect of new restructured standard accounts (flow) with effect from
April 1, 2013 and in a phased manner for the stock of restructured
standard accounts as on March 31, 2013 as under:
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3.75 per cent – with effect from March 31, 2014 (spread over the four quarters of 2013-14)
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5 per cent – with effect from March 31, 2015 (spread over the four quarters of 2014-15)
3. Provision for Diminution in the Fair Value of Restructured Advances
3.1 At present, in terms of paragraph 11.4 of MC
on IRAC Norms dated July 2, 2012, detailed guidelines on the need for
and method of calculation of diminution in the fair value of the
restructured advances have been laid down.
3.2 The WG was of the view that the current
instructions relating to calculation of diminution in fair value of
accounts was appropriate and correctly captured the erosion in the fair
value. Therefore, the same might be continued. It also recommended that
the option of notionally computing the amount of diminution in the
fair value of small accounts at 5 per cent of the total exposure at
small/rural branches in respect of all restructured accounts where the
total dues to bank(s) are less than rupees one crore, may be provided
on a long term basis.
3.3 It has been decided to accept the
recommendation; accordingly, the option of notionally computing the
amount of diminution in the fair value of small accounts at 5 per cent
of the total exposure at small/rural branches in respect of all
restructured accounts where the total dues to bank(s) are less than
rupees one crore would be available till a further review in this
regard.
3.4 While the WG was of the view that the
current instructions relating to calculation of diminution of fair
value of accounts was appropriate and correctly captured the erosion in
the fair value, it is learnt that on a few occasions there are
divergences in the calculation of erosion in the fair value by banks.
In terms of our extant instructions, the erosion in the fair value of
the advance should be computed as the difference between the fair value
of the loan before and after restructuring. Fair value of the loan
before restructuring will be computed as the present value of cash
flows representing the interest at the existing rate charged on the
advance before restructuring and the principal, discounted at a rate
equal to the bank's BPLR or base rate (whichever is applicable to the
borrower) as on the date of restructuring plus the appropriate term
premium and credit risk premium for the borrower category on the date
of restructuring. Fair value of the loan after restructuring will be
computed as the present value of cash flows representing the interest at
the rate charged on the advance on restructuring and the principal,
discounted at a rate equal to the bank's BPLR or base rate (whichever
is applicable to the borrower) as on the date of restructuring plus the
appropriate term premium and credit risk premium for the borrower
category on the date of restructuring.
3.5 Illustratively, divergences could occur if
banks are not appropriately factoring in the term premium on account of
elongation of repayment period on restructuring. In such a case the
term premium used while calculating the present value of cash flows
after restructuring would be higher than the term premium used while
calculating the present value of cash flows before restructuring.
Further, the amount of principal converted into debt/equity instruments
on restructuring would need to be held under AFS and valued as per
usual valuation norms. Since these instruments are getting marked to
market, the erosion in fair value gets captured on such valuation.
Therefore, for the purpose of arriving at the erosion in the fair
value, the NPV calculation of the portion of principal not converted
into debt/equity has to be carried out separately. However, the total
sacrifice involved for the bank would be NPV of the above portion plus
valuation loss on account conversion into debt/equity instruments. The
promoters’ sacrifice requirement would be based on the total sacrifice
amount as calculated above.
3.6 Banks are therefore advised that they should
correctly capture the diminution in fair value of restructured
accounts as it will have a bearing not only on the provisioning
required to be made by them but also on the amount of sacrifice required
from the promoters. Further, there should not be any effort on the
part of the banks to artificially reduce the net present value of cash
flows by resorting to any sort of financial engineering. Banks are also
advised to put in place a proper mechanism of checks and balances to
ensure accurate calculation of erosion in the fair value of
restructured accounts.
4. Criteria for Upgradation of Account Classified as NPA on Restructuring
4.1 In terms of extant instructions contained in
paragraph 11.2.3of MC on IRAC Norms dated July 2, 2012, all
restructured accounts which have been classified as non-performing
assets upon restructuring, would be eligible for upgradation to the
'standard' category after observation of 'satisfactory performance'
during the 'specified period'. Further, ‘specified period’ and ‘satisfactory performance’ have been defined in the Annex 5 of the Master Circular ibid.
4.2 The WG recommended that ‘specified period’
should be redefined in cases of restructuring with multiple credit
facilities as ‘one year from the commencement of the first payment of
interest or principal, whichever is later, on the credit facility with
longest period of moratorium. Further, the WG also recommended that the
accounts classified as NPA on restructuring by the bank should be
upgraded only when all the outstanding loans/facilities in the account
perform satisfactorily during this specified period, i.e. principal and
interest on all facilities in the account are serviced as per terms of
payment.
4.3 RBI has also observed that in some cases of
restructuring with moratorium on payment of principal as well as major
portion of interest, the accounts were upgraded on the basis of payment
of interest on only a small portion of the debt, say FITL, for the
specified period. Such account may still have its inherent credit
weakness as payment of interest on a small portion of loans does not
give evidence of ‘satisfactory performance’.
4.4 It has been decided that the specified
period should be redefined as a period of one year from the commencement
of the first payment of interest or principal, whichever is later, on the credit facility with longest period of moratorium under the terms of restructuring package.
4.5 Consequently, standard accounts classified
as NPA and NPA accounts retained in the same category on restructuring
by the bank should be upgraded only when all the outstanding
loan/facilities in the account perform satisfactorily during the
‘specified period’, i.e. principal and interest on all facilities in the
account are serviced as per terms of payment during that period.
5. Benchmarks on Viability Parameters
5.1 As per extant instruction vide paragraph
11.1.4 of the MC on IRAC Norms dated July 2, 2012, no account will be
taken up for restructuring by the banks unless the financial viability
is established and there is a reasonable certainty of repayment from
the borrower, as per the terms of restructuring package. The viability
should be determined by the banks based on the acceptable viability
benchmarks determined by them, which may be applied on a case-by-case
basis, depending on merits of each case. RBI had illustrated a few
viability parameters in this regard, without giving any benchmarks for
each parameter.
5.2 The WG recommended that RBI may prescribe
the broad benchmarks for the viability parameters based on those used
by CDR Cell; and banks may suitably adopt them with appropriate
adjustments, if any, for specific sectors.
5.3 It is felt that broad benchmarks prescribed
in this regard will be helpful to banks to devise their own benchmarks
for viability. However, as different sectors of economy have different
performance indicators, it will be desirable that banks adopt these
broad benchmarks with suitable modifications.
5.4 Therefore, it has been decided that the
viability should be determined by the banks based on the acceptable
viability parameters and benchmarks for each parameter determined by
them. Illustratively, the broad viability parameters may include the
Return on Capital Employed, Debt Service Coverage Ratio, Gap between
the Internal Rate of Return and Cost of Funds and the amount of
provision required in lieu of the diminution in the fair value of the
restructured advance. The benchmarks for the viability parameters
adopted by the CDR Mechanism are given in the Appendix
and individual banks may suitably adopt them with appropriate
adjustments, if any, for specific sectors while restructuring of
accounts in non-CDR cases.
6. Viability Time Period
6.1 Currently, time period for attaining
viability has been prescribed as one of the conditions for special
asset classification benefit on restructuring. For this purpose,
paragraph 14.2.2 (ii) of the MC on IRAC Norms dated July 2, 2012
prescribes the condition that the unit should become viable in 10
years, if it is engaged in infrastructure activities, and in 7 years in
the case of other units.
6.2 The WG felt that the prescribed time span of
seven years for non-infrastructure borrowal accounts and ten years for
infrastructure accounts for becoming viable on restructuring was too
long and banks should take it as an outer limit.
6.3 In line with the WG’s recommendation, it has
been decided that in order to qualify for the special asset
classification benefit banks should ensure that the unit taken up for
restructuring achieves viability in 8 years, if it is engaged in
infrastructure activities, and in 5 years in other cases.
7. Incentive for Quick Implementation of Restructuring Package
7.1 In terms of extant instruction contained in
paragraph 14.2.1 of MC on IRAC Norms dated July 2, 2012, during the
pendency of the application for restructuring of the advance with the
bank, the usual asset classification norms would continue to apply.
However, as an incentive for quick implementation of the package, if
the approved package is implemented by the bank as per the following
time schedule and subject to fulfilment of certain conditions, the
asset classification status may be restored to the position which
existed when the reference was made to the CDR Cell in respect of cases
covered under the CDR Mechanism or when the restructuring application
was received by the bank in non-CDR cases:
(i) Within 120 days from the date of approval under the CDR Mechanism.
(ii)Within 90 days from the date of receipt of
application by the bank in cases other than those restructured under
the CDR Mechanism.
7.2 In case of non-CDR restructurings, asset
classification benefit is available in case the restructuring package
gets implemented within 90 days from the date of receipt of application.
As 90 days period after receipt of application is considered
insufficient for properly ascertaining the viability of the account,
the WG recommended that the period for quick implementation under
non-CDR mechanism including SME Debt Restructuring mechanism should be
increased to 120 days from the date of application.
7.3 Accordingly, it has been decided that the
incentive for quick implementation of the restructuring package in
non-CDR cases would henceforth be available, if the approved package is
implemented by the bank within 120 days from the date of receipt of
application.
8. Roll over of Short-Term Loans
8.1 As per existing instruction contained
in Sl. No. (iv) under ‘Key Concepts’ in Annex 5 to Master Circular on
IRAC Norms dated July 2, 2012 a restructured account is defined as one
where the bank, for economic or legal reasons relating to the
borrower's financial difficulty, grants to the borrower concessions
that the bank would not otherwise consider. Restructuring would
normally involve modification of terms of the advances/securities, which
would generally include, among others, alteration of repayment period
/repayable amount/the amount of instalments/rate of interest (due to
other than competitive reasons). In view of this definition, any
roll-over of a short term loan will be considered as ‘restructuring’.
8.2 The WG recommended that RBI may clarify that
the cases of roll-over of short term loans, where proper pre-sanction
assessment has been made, such roll-over is allowed depending upon the
actual requirement of the borrower and no concession has been provided
due to weakness of the borrower, then these might not be considered as
restructured accounts. However, if such accounts are rolled-over for
more than 2 times, then third roll-over onwards the account would have
to be treated as a restructured account.
8.3 It has been decided to accept the recommendation.
9. Asset Classification Benefits on Restructuring of Infrastructure Project Loans - Jurisdictional Limits
9.1 As per the existing instruction contained in
paragraph 4.2.15 of MC on IRAC Norms dated July 2, 2012, certain
relaxations regarding asset classification are extended on change in
date of commencement of commercial operation (DCCO) for Infrastructure
Projects. Relaxations are also extended regarding tangible security as a
condition for asset classification benefit on restructuring of bank
financing to infrastructure sector. At present no jurisdictional limit
is stipulated for availing of above relaxations and as a result, this
benefit is available to all infrastructure projects irrespective of
their location, i.e. whether in India or abroad.
9.2 The WG was of the view that the above
relaxations in restructuring guidelines be permitted for infrastructure
projects in view of the importance of infrastructure development in
our country. Accordingly, it has been decided that the asset
classification benefit available to infrastructure projects on change
of DCCO as per the extant instructions will be henceforth available
only in cases of projects implemented in India for infrastructure sector.
10. Promoters’ Sacrifice
10.1 In terms of extant instruction contained in
paragraph 14.2.2.(iv) of MC on IRAC Norms dated July 2, 2012, one of
the conditions for eligibility for regulatory asset classification
benefit on restructuring is that promoters' sacrifice and additional
funds brought by them should be a minimum of 15 per cent of banks'
sacrifice. The term 'bank's sacrifice' means the amount of "erosion in
the fair value of the advance". It is also prescribed that promoters’
sacrifice may be brought in two instalments and it may be brought in
different forms as indicated therein.
10.2 The WG recommended that RBI may consider a
higher amount of promoters’ sacrifice in cases of restructuring of
large exposures under CDR mechanism. Further, the WG recommended that
the promoters’ contribution should be prescribed at a minimum of 15 per cent of the diminution in fair value or 2 per cent of the restructured debt, whichever is higher.
10.3 Accordingly, it has been decided that promoters’ sacrifice and additional funds brought by them should be a minimum
of 15 per cent of banks’ sacrifice or 2 per cent of the restructured
debt, whichever is higher. 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.
11. Conversion of Debt into Equity / Preference Shares
11.1 At present vide paragraphs 15.1, 15.2
& 15.3 of MC on IRAC Norms dated July 2, 2012, there is no
regulatory cap on the percentage of debt which can be converted into
equity/preference shares on restructuring of advances, subject to
adherence to statutory requirement under Section 19 of the BR Act 1949
and relevant SEBI regulations.
11.2 The WG recommended 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 to a cap (say 10 per cent of the restructured debt). It
also recommended that any conversion of debt into equity should be done
only in the case of listed companies.
11.3 It has been decided to accept the recommendation.
12. Right of Recompense
12.1 In terms of existing instruction contained
in paragraph 5.7under Annex 4 of the MC on IRAC Norms dated July 2,
2012 all CDR approved packages must incorporate creditors' right to
accelerate repayment and borrowers' right to pre-pay. The right of
recompense should be based on certain performance criteria to be
decided by the Standing Forum.
12.2 The WG recommended that CDR Standing Forum/
Core Group may take a view as to whether their clause on ‘recompense’
may be made somewhat flexible in order to facilitate the exit of the
borrowers from CDR Cell. However, it also recommended that in any case
75 per cent of the amount of recompense calculated should be recovered
from the borrowers and in cases of restructuring where a facility has
been granted below base rate, 100 per cent of the recompense amount
should be recovered.
12.3 The WG also recommended that the present
recommendatory nature of ‘recompense’ clause should be made mandatory
even in cases of non-CDR restructurings.
12.4 Accordingly, it has been decided that all
restructuring packages must incorporate ‘Right to recompense’ clause
and it should be based on certain performance criteria of the borrower.
In any case minimum 75 per cent of the recompense amount should be
recovered by the lenders and in cases where some facility under
restructuring has been extended below base rate, 100 per cent of the
recompense amount should be recovered.
13. Personal Guarantee of Promoters
13.1 As per the extant restructuring guidelines,
personal guarantee by the promoter is one of the necessary conditions
(pargraph 14.2.2 of MC on IRAC Norms dated July 2, 2012) for the asset
classification benefit except when the unit is affected by external
factors pertaining to the economy and industry.
13.2 As stipulating personal guarantee will
ensure promoters’ “skin in the game” or commitment to the restructuring
package, the WG recommended that obtaining the personal guarantee of
promoters be made a mandatory requirement in all cases of
restructuring, i.e. even if the restructuring is necessitated on
account of external factors pertaining to the economy and industry. It
also recommended that corporate guarantee cannot be a substitute for
the promoters’ personal guarantee.
13.3 Accordingly, 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. However, corporate guarantee can be
accepted in those cases where the promoters of a company are not
individuals but other corporate bodies or where the individual
promoters cannot be clearly identified.
Broad benchmarks for the viability parameters
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Return on capital employed should be at least equivalent to 5 year Government security yield plus 2 per cent.
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The debt service coverage ratio should be greater than 1.25 within the 5 years period in which the unit should become viable and on year to year basis the ratio should be above 1. The normal debt service coverage ratio for 10 years repayment period should be around 1.33.
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The benchmark gap between internal rate of return and cost of capital should be at least 1 per cent.
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Operating and cash break even points should be worked out and they should be comparable with the industry norms.
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Trends of the company based on historical data and future projections should be comparable with the industry. Thus behaviour of past and future EBIDTA should be studied and compared with industry average.
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Loan life ratio (LLR), as defined below should be 1.4, which would give a cushion of 40% to the amount of loan to be serviced.
Present value of total available cash flow (ACF) during the loan life period
(including interest and principal)
(including interest and principal)
LLR= ----------------------------------------------------------------------------------------------
Maximum amount of loan
Maximum amount of loan
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