Reserve Bank panel pushes for tighter norms for loan recasts

Promoter’s sacrifice and additional funds required to be brought in by promoters should generally be brought in upfront.

Written by ENS Economic Bureau | Mumbai | Published: July 21, 2012 12:54 am

The Reserve Bank of India (RBI) plans to ask banks to provision more cash against bad loans that will impact their profits and demand greater “sacrifice” by promoters if their company runs into trouble. The plan will impact the huge number of corporate debt restructuring request banks have been flooded with as the Indian growth rate too has begun to falter.

A working paper commissioned by the RBI has suggested that banks must set aside 5 per cent of their total assets for loans that were shown as non performing but are subsequently declared standard. The current provisions are 2 per cent.

A record 389 companies with loans amounting to Rs 2,05,692 crore had approached the corporate debt restructuring cell of the banks and financial institutions during the fiscal ended March 2012,a 45.71 per cent jump from Rs 1,41,158 crore in the same period of last fiscal.

The panel,headed by RBI executive director B Mahapatra,said a higher amount of promoters’ sacrifice in cases of restructuring of large exposures under CDR (corporate debt restructuring) mechanism needs to be considered. “Further,the promoters’ contribution should be prescribed at a minimum of 15 per cent of the diminution in fair value of the restructured account or 2 per cent of the restructured debt,whichever is higher,” it said.

Promoter’s sacrifice and additional funds required to be brought in by promoters should generally be brought in upfront. “However,if banks are convinced that the promoters face genuine difficulty in bringing their share of the sacrifice immediately and need some extension of time to fulfil their commitments,the promoters could be allowed to bring in 50 per cent of their sacrifice — 50 per cent of 15 per cent — upfront and the balance in one year.

The RBI’s working group has suggested that conversion of debt into preference shares should be done as a last resort and only for listed companies,while classification of such loans as bad or non-performing will be considered after two years. It observed that banks were adversely affected in cases of conversion of a large portion of debt into equity instruments,especially preference shares. The members noted that the trend of such conversion has increased recently,especially in cases of large exposures restructured under CDR mechanism.

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