Posts
PART B
Background
The
guidelines on restructuring of advances (other than restructuring due to
natural calamities) are divided into the following four categories :
(i)
Restructuring of advances to industrial
units.
(ii)
Restructuring of advances to industrial
units under the CDR Mechanism
(iii)
Restructuring of advances extended to
SME
(iv) Restructuring
of all other advances.
The details of the institutional
/ organizational framework for CDR Mechanism and SME Debt Restructuring
Mechanism are given in Annex – 4. The CDR Mechanism (Annex - 4) will
also be available to the corporates engaged in non-industrial activities.
( In order to understand it
better, Annex-4 has been taken up as a separate chapter in the blog).
General Principles and Prudential
Norms for Restructured Advances
The principles and norms are
applicable to all advances including the borrowers.
Eligibility criteria for
restructuring of advances
Banks may restructure accounts
classified under 'standard', 'sub-standard' and 'doubtful' categories.
Banks cannot restructure accounts
with retrospective effect. While a proposal is under consideration, the usual
asset classification would apply. The status as on the date of approval would
be relevant to decide the asset classification after restructuring.
Normally, restructuring cannot
take place unless changes in the original loan agreement are made with the
formal application of the debtor. However, restructuring can be initiated by
the bank in deserving cases subject to consent of the customer.
No
account will be taken up for restructuring unless the financial viability is
established and there is a reasonable certainty of repayment or else it will be
treated as an attempt at ever greening a weak credit facility.
The
viability should be determined based on parameters such as 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.
Cases
of frauds and malfeasance will be ineligible for restructuring. The
restructuring of willful Defaulter cases may be done with Board's approval. The
restructuring under the CDR Mechanism may be carried out with the approval of
the Core Group only.
BIFR
cases are not eligible for restructuring without their approval. The CDR
Core Group in case of CDR, the lead bank in the case of SME Debt
Restructuring and the individual banks in other cases, may consider the
proposals for restructuring.
Restructuring
could take place in the following stages:
(a)
before commencement of commercial
production / operation;
(b)
after commencement but before the asset becomes
'sub-standard';
(c)
after commencement and the asset has
been classified as 'sub-standard' or 'doubtful'.
The accounts classified as
'standard assets' should be re-classified as 'sub-standard assets' upon
restructuring.
The NPAs would continue to follow
the normal asset classification norms with reference to the pre-restructuring
repayment schedule.
NPA accounts post restructure, should be
upgraded only when all the facilities in the account perform satisfactorily
during the ‘specified period’ (One year from the commencement of the
first repayment, on the credit facility with longest period of moratorium).
Any additional finance may be
treated as 'standard asset' during the specified period. However, in
pre-restructuring 'sub-standard' and 'doubtful' accounts, interest on the
additional finance should be recognised only on cash basis. At the end of the
specified period, if the asset does not qualify for upgradation, it shall be
placed in the same category as the restructured debt.
Income recognition norms
Interest
in respect of restructured 'standard’ assets will be recognized on accrual
basis and that in case of 'NPAs', it will be recognized on cash basis.
Provisioning norms
Provision on restructured advances
(i) Banks
will hold provision against restructured advances as per provisioning norms.
(ii) Restructured
‘standard’ accounts will attract a higher provision in the first two years from
the date of restructuring. Where moratorium is allowed, the provisioning will
be for the period of moratorium and two years thereafter.
(iii) Restructured
NPAs, when upgraded will attract a higher provision in the first year from the
date of upgradation.
(iv) The
higher provision on restructured standard advances:
·
3.50 %- with effect from March 31, 2014
(spread over the four quarters of 2013-14)
·
4.25 %- with effect from March 31, 2015
(spread over the four quarters of 2014-15)
·
5.00 %- - with effect from March 31,
2016 (spread over the four quarters of 2015-16)
Provision for diminution in the
fair value of restructured advances
(i)
Banks should measure diminution in fair value on account of restructuring and
make special provisions in addition to existing norms of provisioning, and in
an account distinct from that of normal provisions.
ii)
It was observed that, there were divergences in the calculation of diminution
of fair value of accounts by banks. Banks are advised that they should
correctly capture the diminution in fair value as it will have a bearing not
only on the provisioning but also on the amount of sacrifice required from the
promoters.
(iii)
In the case of working capital facilities, the diminution in the fair value of
the CC / OD component may be computed, considering the higher of the balance
outstanding or sanctioned limit as the principal amount and taking the tenor as
one year. The term premium in the discount factor would be as applicable for
one year. The fair value of the term loan components would be computed as per
actual cash flows and taking the term premium in the discount factor as
applicable for the maturity of the respective term loan components.
(iv)
Where security is taken in lieu of the diminution in the fair value, it should
be valued at Re.1/- till maturity of the security..
(v)
The diminution in the fair value may be
re-computed on each balance sheet date till full repayment, so as to capture
the changes on account of changes in BPLR or base rate, term premium and the
credit category of the borrower. Consequently, banks may provide for the
shortfall in provision or reverse the amount of excess provision held in the
distinct account.
(vi) If a bank finds it difficult to ensure
computation of diminution in the fair value, it will have the option of
notionally computing the amount and providing therefor, at 5% of the total
exposure, in respect of all restructured accounts of less than Rupees one
crore.
The
total provisions required against an account are capped at 100% of the
outstanding debt amount.
Risk-Weights
a. Restructured
housing loans should be risk weighted with an additional risk weight of 25% age
points.
b.
The unrated standard dues of corporates
should be assigned a higher risk weight of 125% until satisfactory performance
under the revised terms has been established in the specific period.
Prudential Norms for Conversion
of Principal into Debt / Equity
Asset classification norms
A
part of the principal amount can be converted into debt or equity instruments
as part of restructuring. These instruments will
be classified in the same category as that of the
restructured asset.
Income recognition norms
Standard Accounts
In the
case of restructured accounts classified as 'standard', the income generated by
these instruments may be recognised on accrual basis.
Non- Performing Accounts
In the
case of restructured accounts classified as NPAs, the income, generated by
these instruments may be recognised only on cash basis.
Valuation
and provisioning norms
These
instruments should be held under AFS and valued as per usual valuation norms.
Equity classified as standard asset should be valued either at market value
where quoted or at break-up value, based on the company's latest balance sheet.
In case the latest balance sheet is not available, the shares are to be valued
at Re. 1. Equity instrument classified as NPA should be valued at market value,
if quoted, otherwise it should be valued at Re. 1. Depreciation on these
instruments should not be offset against the appreciation in any other securities
held under the AFS category.
Prudential Norms for Conversion
of Unpaid Interest into 'Funded Interest Term Loan' (FITL), Debt or Equity
Instruments
Asset
classification norms
The
FITL, debt or equity instrument created by conversion of unpaid interest will
be classified in the same category as that of the restructured advance.
Income recognition norms
The
income generated by instruments classified as standard may be recognised on
accrual basis, and on cash basis in case of instruments classified as NPA.
The unrealised income represented by such
instruments should have a corresponding credit in an account styled as
"Sundry Liabilities Account (Interest Capitalization)".
In
the case of conversion of unrealised interest into quoted equities, interest
income can be recognised after the account is upgraded to standard category at
market value of equity, as on the date of upgradation, not exceeding the amount
of interest converted into equity.
Upon realization of these instruments, the amount
received will be recognized in the P&L Account, while simultaneously
reducing the balance in the "Sundry Liabilities Account (Interest
Capitalisation)".
Valuation
& Provisioning norms
The
depreciation, if any, on valuation may be charged to the Sundry Liabilities
(Interest Capitalisation) Account.
With effect from April 1, 2015, a
standard account on restructuring (for reasons other than change in DCCO) would
be immediately classified as sub-standard. NPAs, upon restructuring, would
continue to have the same asset classification as prior to restructuring and
slip into lower categories as per the asset classification norms with reference
to the pre-restructuring repayment schedule.
Miscellaneous
The
banks should decide on the issue regarding convertibility (into equity) option
as a part of restructuring exercise keeping in view the statutory requirement
under Section 19 of the Banking Regulation Act, 1949, and relevant SEBI
regulations.
Conversion
of debt into preference shares should be done only as a last resort and should be
restricted to a cap. Any conversion to equity should be done only in the case
of listed companies.
Acquisition
of equity shares / convertible bonds / convertible debentures by way of
conversion of debt can be done without seeking prior approval from RBI, even if
by such acquisition the prudential capital market exposure limit is breached.
However, this will be subject to reporting to RBI every month along with the
regular DSB Return on Asset Quality. Nonetheless, banks will have to comply
with the provisions of Section 19(2) of the Banking Regulation Act, 1949.
Acquisition
of non-SLR securities by way of conversion of debt is exempted from the
mandatory rating requirement and the prudential limit on investment in unlisted
non-SLR securities, subject to periodical reporting to the RBI in the aforesaid
DSB return.
Banks
may consider incorporating creditor’s rights to accelerate repayment and the
borrower’s right to pre pay, in the package. Further, 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% 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% of
the recompense amount should be recovered.
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.
Disclosures
With effect from 2012-13, banks
should disclose information relating to number and amount of advances
restructured, and the amount of diminution in the fair value of the
restructured advances under CDR Mechanism, SME Debt Restructuring Mechanism and
other categories separately. Even if only one of the facilities has been
restructured, the bank should disclose the entire outstanding amount pertaining
to all the facilities of that particular borrower. The disclosure format
includes the following:
i. details
of accounts restructured on a cumulative basis excluding the standard
restructured accounts which cease to attract higher provision and risk weight;
ii. provisions
made on restructured accounts under various categories; and
iii. details
of movement of restructured accounts.
The disclosure is no longer
required, once the higher provisions and risk weights on restructured advances
revert to the normal level. However, the provision for
diminution in the fair value should continue to be maintained.
It has been reiterated that the
basic objective of restructuring is to preserve economic value of units, not
ever-greening of problem accounts. This can be achieved by banks and the
borrowers only by careful assessment of the viability, quick detection of
weaknesses in accounts and a time-bound implementation of restructuring
packages.
Appendix
Broad
benchmarks for the viability parameters
i.
Return on capital employed should be at
least equivalent to 5 year Government security yield plus 2 per cent.
ii.
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.
iii.
The benchmark gap between internal rate
of return and cost of capital should be at least 1 per cent.
iv.
Operating and cash break even points
should be worked out and they should be comparable with the industry norms.
v.
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.
vi.
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)
LLR= ----------------------------------------------------------------------------------------------
Maximum amount of loan
Based on the
Master Circular of 1/7/15.
No comments:
Post a Comment