Friday, August 14, 2015

PRUDENTIAL NORMS ON IRAC AND PROVISIONING



In line with the international practices and as per the recommendations of Committee on the Financial System (Chairman Shri M. Narasimham), the Reserve Bank of India has introduced, prudential norms for income recognition, asset classification and provisioning for the advances.

DEFINITIONS

NPAs

An asset becomes non performing when it ceases to generate income.

A non performing financial assets (NPA) is a loan or an advance where;

i.        The instalment remain overdue for a period of more than 90 days in respect of a term loan,
ii.      the account remains ‘out of order’ in respect of an Overdraft/Cash Credit,
iii.    the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
iv.    the instalment remains overdue for two crop seasons for short duration crops,
v.      the instalment remains overdue for one crop season for long duration crops,
vi.     the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction.
vii.   in respect of derivative transactions, the overdue receivables representing positive mark-to-market value remaining unpaid for a period of 90 days from the specified due date.

In case of interest payments, if the interest during any quarter is not serviced fully within 90 days from the end of the quarter.


‘Out of Order’ status
·         If the balance remains in excess of the Limit/DP, continuously for 90 days.
·         Where the balance is less than the Limit/DP, but there are no credits continuously for 90 days as on the date of Balance Sheet or
·         Credits are not enough to cover the interest debited during the same period.

‘Overdue’
Any amount due to the bank is ‘overdue’ if it is not paid on the due date.

INCOME RECOGNITION

Income Recognition Policy
The policy of income recognition is based on the record of recovery. Banks should not take interest on any NPA to income account.

Fees and commissions earned as a result of renegotiations or rescheduling should be recognised on an accrual basis over the period covered by the revised extension of credit.

Reversal of income
If any advance becomes NPA, the entire interest/ charges credited to income account in the past periods, should be reversed if the same is not realised.

Leased Assets
The finance charge component of finance income on the leased asset which was credited to income account, but remained unrealised, should be reversed or provided for in the current accounting period.

Appropriation of recovery in NPAs
Interest realised on NPAs may be taken to income account provided the credits are not out of fresh/ additional credit facilities sanctioned to him.

In the absence of a clear agreement for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should exercise the right of appropriation in a uniform and consistent manner.

Interest Application
Banks may continue to record the accrued interest in a Memorandum account.


ASSET CLASSIFICATION

Categories of NPAs
NPAs are to be classified as below based on the period for which the asset has remained non performing and the realisability of the dues:

Substandard Assets is an asset which has remained NPA for 12 months or less.

Doubtful Assets Is an asset which has remained in the substandard category for a period of over 12 months.

Loss Assets is an asset where loss has been identified by the bank or internal or external auditors or RBI inspectors but the amount has not been written off wholly.

Guidelines for classification of assets
Classification should be done by considering the degree of credit weaknesses and the extent of dependence on collateral security .

Banks should establish appropriate internal systems for proper and timely identification of NPAs.

Availability of security / net worth of borrower/ guarantor
The availability of security or net worth of borrower/ guarantor should not be taken into account for the purpose of treating an advance as NPA.


Accounts with temporary deficiencies
Bank should not classify an advance account as NPA merely due to some temporary deficiencies. The given guidelines may be followed while classifying such accounts:

i) The outstanding in the account based on drawing power calculated from stock statements older than three months, would be deemed as irregular.
The account will be classified as NPA if such irregular drawings are permitted for a continuous period of 90 days.

ii) An account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction, it will be treated as NPA.


Upgradation of loan accounts classified as NPAs
If arrears are paid by the borrower in a NPA account, the account should be upgraded.

Accounts regularised near about the balance sheet date
Where the account indicates inherent weakness, the account should be deemed as a NPA even if a solitary or a few credits are recorded before the balance sheet date to regularize the account.

Asset Classification to be borrower-wise and not facility-wise

i)                    All the facilities granted by a bank and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/investment which has become irregular.

ii)                  Debits due to devolvement of LC or invoked guarantees should be treated as NPA along with the balance outstanding in the principle account.

iii)                The bills discounted under LC favouring a borrower may not be classified as a Non-performing advance (NPA), when any other facility granted to the borrower is classified as NPA. However, in case of devolvement it will immediately be classified as NPA with effect from the date when the other facilities had been classified as NPA.

iv)  Derivative Contracts

a)   The overdue receivables representing positive mark-to-market value of a derivative contract remaining unpaid for 90 days or more will be treated as NPA. In case the overdues arising from forward contracts, plain vanilla swaps and options become NPAs, all other funded facilities granted to the client shall be classified as NPA.
b)   If the client also enjoys a Cash Credit or Overdraft facility, the receivables mentioned above may be debited to that account on due date.
c)   Where the contract provides for settlement of the current mark-to-market value before its maturity, only the current credit exposure will be classified as NPA after an overdue period of 90 days.
d)   The overdue receivables mentioned above, already taken to 'Profit and Loss a/c' should be reversed, and held in a ‘Suspense Account-Crystalised Receivables’ in the same manner as done in the case of overdue advances.
e)                  Further, in cases where the derivative contracts provides for more settlements in future, the MTM value will comprise of (a) crystallised receivables and (b) positive or negative MTM.
If the derivative contract is not terminated and the overdue receivable remains unpaid for 90 days, in addition to the crystallised receivables, the positive MTM pertaining to future receivables may also be reversed from Profit and Loss Account to another account styled as ‘Suspense Account – Positive MTM’.
The subsequent positive changes in the MTM value may be credited to the ‘Suspense Account – Positive MTM’, not to P&L Account. The subsequent decline in MTM value may be adjusted against the balance in ‘Suspense Account – Positive MTM’. If the balance in this account is not sufficient, the remaining amount may be debited to the P&L Account. On payment of the overdues in cash, the balance in the ‘Suspense Account-Crystalised Receivables’ may be transferred to the ‘Profit and Loss Account’, to that extent.
f)                   If the bank has other derivative exposures the same rule as mentioned above will be followed.
g)   Since the legal position regarding bilateral netting is not clear, receivables and payables from/to the same counterparty should not be netted.
h)                  Similarly, in case a fund-based credit facility is classified as NPA, the MTMs of all the derivative exposures should be treated in the manner discussed above.


Advances under consortium arrangements
Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances.

Accounts where there is erosion in the value of security/frauds committed by borrowers
i)        In cases of erosion in the value of security or non-availability of security and existence of frauds, the asset should be straightaway classified as doubtful or loss:
a. NPAs where the realisable value of the security is less than 50% of the value assessed by the bank or accepted by RBI may be straightaway classified under doubtful category.

b. If such realisable value of the security is less than 10% of the outstanding in the accounts, the asset should be straightaway classified as loss asset.


ii)      Provisioning norms in respect of all cases of fraud:
a.       The entire amount due to the bank or for which the bank is liable is to be provided for over a period of four quarters commencing with the quarter in which the fraud was detected;

b.      Where there has been delay in reporting the fraud to the Reserve Bank, the entire provisioning is required to be made at once.

Advances to Primary Agricultural Credit Societies (PACS)/Farmers’ Service Societies (FSS) ceded to Commercial Banks
In respect of advances under the on- lending system, only the particular account  of the PAC /FSS in default will be classified as NPA. All the other accounts, outside the on -lending arrangement, will become NPA even if one of the credit facilities granted to the same borrower becomes NPA.

Advances against Term Deposits, NSCs, KVPs/IVPs, etc.
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs, provided adequate margin is available. Advances against gold ornaments, government securities and other securities are not covered by this exemption.

Loans with moratorium for payment of interest

i.   Where moratorium is available for payment of interest, payment of interest becomes 'due' only after the moratorium or gestation period is over. The interest becomes overdue after only after due date for payment of interest, if it remains uncollected.

ii.     In the case of staff housing loan where interest is payable after recovery of principal, the account becomes NPA only when there is a default in repayment of installment of principal or interest on the respective due dates.

Agricultural advances

i. A loan for short duration crops will be treated as NPA, if it remains overdue for two crop seasons. A loan for long duration crops will be treated as NPA, if it remains overdue for one crop season. Long duration crops will be identified by SLBC.
The above norms should be made applicable only to Farm Credit extended for agricultural activities. In respect of other agricultural loans and term loans given to non-agriculturists, identification of NPAs would be done on the same basis as non-agricultural advances.

ii. Where natural calamities impair the repaying capacity of borrowers, banks may decide on conversion of the short-term loan into a term loan or re-schedulement of the repayment period and sanction fresh short-term loan, subject to guidelines of RBI.

iii. The converted term loan as well as fresh short-term loan need not be classified as NPA. The asset classification of these loans would be as per the revised terms.

iv. While fixing the repayment schedule in case of rural housing advances granted to agriculturists under Indira Awas Yojana and Golden Jubilee Rural Housing Finance Scheme, banks should ensure that the installments are linked to crop cycles..

Government guaranteed advances
The credit facilities guaranteed by Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. This is not applicable to State Government guaranteed exposures.

Projects under implementation
In case of Project Finance, the ‘Date of Completion’ and the ‘Date of Commencement of Commercial Operations’ (DCCO), of the project should be documented in the appraisal during sanction and also at the time of financial closure of the project.

Project Loans
The following asset classification norms would apply to the project loans before commencement of commercial operations.

For this purpose, all project loans have been divided into the following two categories:

(a)         Project Loans for infrastructure sector
(b)        Project Loans for non-infrastructure sector

'Project Loan' here would mean any term loan extended for the purpose of setting up of an economic venture. ‘Infrastructure’ Sector is a sector as defined as per the list given by RBI.

Deferment of DCCO

i)  Deferment of DCCO and consequential shift in repayment schedule for equal or shorter duration will not be treated as restructuring provided that:

(a)    The revised DCCO falls within two years and one year of the original DCCO stipulated in the financial closure for infra and non-infra projects respectively;
(b)   All other terms and conditions of the loan remain unchanged.

ii) Banks may restructure project loans other than commercial real estate, by way of revision of DCCO beyond the time limits above and retain the ‘standard’ asset classification, if the fresh DCCO is fixed within the following limits provided the application is received when the account is still standard:

(a) Infrastructure Projects involving court cases
Up to four years of original DCCO, in case the reason for extension of DCCO is arbitration proceedings or a court case.

(b)    Infrastructure Projects delayed for other reasons beyond the control of promoters
Up to three years of original DCCO, in case the reason for extension of DCCO is beyond the control of promoters (other than court cases).

(c)  Project Loans for Non-Infrastructure Sector
Up to two years of original DCCO.

iii). The other conditions applicable would be:
a.           Where there is moratorium for payment of interest, banks should not book income on accrual basis beyond two years and one year from the original DCCO for infra and non-infra projects respectively.
b.           Banks should maintain following provisions as long as these are classified as standard assets in addition to provision for diminution in fair value due to extension of DCCO:
Particulars

Provisioning Requirement
If the revised DCCO is within prescribed time
0.40 %
If the DCCO is extended:
i) Upto four years or three years from the original DCCO for infra projects,

ii) Upto two years from the original DCCO, for non-infra projects

Restructured wef 1/6/13:
5.00 %– From the date of restructuring till the revised DCCO.

Stock of Project loans classified as restructured as on 1/6/13:
* 3.50 % - wef 31/3/14 (Over the 4 quarters of 13-14)
* 4.25 % - wef 31/3/15 (Over the 4 quarters of 14-15)
* 5.00 % - wef 31/3/16 (Over the 4 quarters of 15-16)

The above provisions will be applicable from the date of restructuring till the revised DCCO or 2 years from the date of restructuring, whichever is later.
(v) Where Appointed Date as per the concession agreement is shifted due to the inability of the Concession Authority to comply with the requisite conditions, change in DCCO need not be treated as ‘restructuring’, subject to:

a) The project is an infrastructure project under public private partnership model;
b) The loan disbursement is yet to begin;
c) The revised DCCO is documented by way of a supplementary agreement between the borrower and lender and;
d) Project viability has been reassessed and sanction has been obtained at the time of supplementary agreement.

Projects under Implementation Change in Ownership
i.  If a change in ownership takes place during the periods quoted above or before the original DCCO, banks may permit additional extension of the DCCO up to two years, without any change in asset classification subject to the conditions stipulated below. Banks may also shift/extend repayment schedule, by an equal or shorter duration.

ii.  Where extension on account of change in ownership, takes place before the original DCCO or the extended period, and the project fails to commence commercial operations by the extended DCCO, the project will be eligible for further extension of DCCO.

iii. The provisions are subject to the following conditions:
a) Banks should establish that implementation of the project is affected primarily due to inadequacies of the current promoters and with a change in ownership there is a probability of commencement of commercial operations within the extended period;

b)      The project should be taken-over by a new promoter with sufficient expertise in the field. If the acquisition is being carried out by a SPV, the bank should demonstrate that the acquiring entity is part of a new promoter group with sufficient expertise;

c)         The new promoters should own at least 51 %of the paid up equity capital. If he is a non-resident, and in sectors where the ceiling on foreign investment is less than 51 per cent, the new promoter should own at least 26 %of the paid up equity capital or up to applicable foreign investment limit, whichever is higher, provided banks are satisfied that with this equity stake the new promoter controls the management of the project;

d)         Viability of the project should be established to the satisfaction of the banks.

e)         Intra-group business restructuring/mergers/acquisitions/takeover of the project by other entities, belonging to the existing promoter will not qualify;

f) Asset classification as on the ‘reference date’ would continue during the extended period. The ‘reference date’ would be the date of execution of preliminary binding agreement, provided that the acquisition/takeover is completed within a period of 90 days from the date of execution of the agreement. If the change in ownership is not completed within 90 days, the ‘reference date’ would be the effective date of acquisition/takeover;

g) The new owners/promoters are expected to bring in additional money required to complete the project. Financing of cost overrun beyond the ceiling prescribed in the section on Cost overrun would be treated as an event of restructuring even if the extension of DCCO is within the limits prescribed above;

h)    While considering the extension of DCCO, banks shall make sure that the repayment schedule does not extend beyond 85 %of the economic life/concession period of the project; and

i)  This facility would be available to a project only once and will not be available during subsequent change in ownership.

iv. Loans covered under this guideline would be subjected to extant provisioning norms.

Other Issues
(i) All other aspects of restructuring of project loans before and after commencement of commercial operations would be governed by the restructuring norms of RBI.

(ii) Any change in the repayment schedule caused due to an increase in the project outlay on account of increase in scope and size of the project, would not be treated as restructuring if:

(a)           The increase in scope and size of the project takes place before commencement of commercial operations of the existing project.
(b)         The rise in cost excluding any cost-overrun in respect of the original project is 25% or more of the original outlay.
(c)         The bank re-assesses the viability of the project before approving the enhancement of scope and fixing a fresh DCCO.
(d)         On re-rating, the new rating is not below the previous rating by more than one notch.

(iii)    Multiple revisions of the DCCO and consequential shift in repayment schedule will be treated as a single event of restructuring provided that the revised DCCO is fixed within the respective time limits, and all other terms and conditions remained unchanged.

(iv)      Banks may extend DCCO beyond the respective time limits; in that case, banks will not be able to retain the ‘standard’ asset classification status.

(v)   In all the above cases of restructuring where regulatory forbearance has been extended, the Boards of banks should satisfy themselves about the viability of the project and the restructuring plan.

Income recognition

(i)     Banks may recognise income on accrual basis in respect of the projects under implementation, which are classified as ‘standard’.

(ii)   Banks should recognise income only on realisation on cash basis in respect of the projects under implementation which are classified as a ‘substandard’ asset.

(iii) Wrongly recognised income in the current year should be reversed and of the previous years should be provided for. Regarding the regulatory treatment of ‘funded interest’ recognised as income and ‘conversion into equity, debentures or any other instrument’ banks should adopt the following:
a)                  Funded Interest: Income recognition in respect of the NPAs should be only on realisation and not if the overdue interest has been funded. If, however, the amount of funded interest is recognised as income, a provision for an equal amount should also be made simultaneously.
b)                  Conversion  into  equity,  debentures or  any other  instrument:  If the amount of interest dues is converted into such instrument, and income is recognised in consequence, full provision should be made for the amount of income so recognised. Such provision would be in addition to the amount of provision that may be necessary for the depreciation in the value of the equity or other instruments. However, if the conversion of interest is into equity which is quoted, interest income can be recognised at market value of equity, as on the date of conversion, not exceeding the amount of interest converted to equity. Such equity must thereafter be classified in the “available for sale” category and valued at lower of cost or market value. In case of conversion of principal and /or interest in respect of NPAs into debentures, such debentures should be treated as NPA, ab initio, in the same asset classification as was applicable to loan just before conversion and provision made as per norms. This norm would also apply to zero coupon bonds or other instruments which seek to defer the liability of the issuer. On such debentures, income should be recognised only on realisation basis. The income in respect of unrealised interest which is converted into debentures or any other fixed maturity instrument should be recognised only on redemption of such instrument. Subject to the above, the equity shares or other instruments arising from conversion of the principal amount of loan would also be subject to the usual prudential valuation norms as applicable to such instruments.

Takeout Finance
Takeout finance is a product for funding of long-term infrastructure projects. Under this scheme, the bank will have an arrangement with another financial institution for transferring to the latter the outstanding in their books as per a pre determined arrangement. The taking over institution should make provisions treating the account as NPA from the actual date of it becoming NPA even though the account was not in its books as on that date.

Post-shipment Supplier's Credit
i.         In respect of post-shipment credit for which ECGC cover is available, EXIM Bank has introduced a guarantee-cum-refinance programme whereby, in the event of default, EXIM Bank will pay the guaranteed amount to the bank within a period of 30 days from the day the bank invokes the guarantee after the exporter has filed claim with ECGC.

ii.      The account need not be classified as NPA to the extent of payment received from EXIM Bank.

Export Project Finance
i.        In respect of export project finance, there could be instances where the importer has paid the dues to the bank abroad but the bank is unable to remit the amount due to political developments such as war, strife, UN embargo, etc.

ii.      In  such  cases, where the bank can establish the above fact through documentary evidence,  the asset classification may be made after a period of one year from the date the amount was deposited by the importer in the bank abroad.

Advances under rehabilitation approved by Board for Industrial and Financial Reconstruction (BIFR)/Term Lending Institutions (TLIs)
While the existing credit facilities sanctioned to a unit under rehabilitation packages approved by BIFR/TLIs will continue to be classified as substandard or doubtful, in respect of additional facilities, the IRAC norms will become applicable after a period of one year from the date of disbursement.

Transactions Involving Transfer of Assets through Direct Assignment of Cash Flows and the Underlying Securities

i)                    Originating Bank: The asset classification and provisioning rules in respect of the exposure representing the Minimum Retention Requirement (MRR) of the Originator of the asset would be as under:
a)    The originating bank may maintain a consolidated account of the amount representing MRR if the loans transferred are retail loans. In such a case, the amount receivable and its periodicity should be clearly established and the overdue status should be determined with reference to repayment of such amount. Alternatively, the originating bank may continue to maintain borrower-wise accounts. In such a case, the overdue status should be determined individually.

b)   In the case of transfer of loans other than retail loans, the originator should maintain borrower-wise accounts in respect of each loan. In such a case, the overdue status should be determined individually.

c)    If the originating bank acts as a servicing agent of the assignee bank for the loans transferred, the overdue status of such loans should form the basis of classification of the entire MRR/individual loans representing MRR as NPA in the books of the originating bank, depending upon the method of accounting followed.


ii)                  Purchasing Bank: In purchase of pools of both retail and non-retail loans, IRAC and provisioning norms for the purchasing bank will be based on individual obligors and not on portfolio. Bank’s auditors should conduct checks of these portfolios with reference to the basic records maintained by the servicing agent.

iii)                The above guidelines do not apply to
(a)       Transfer of loan accounts to other bank/FIs/NBFCs and vice versa, at the request of borrower;
(b)   Inter-bank participations;
(c)  Trading in bonds;
(d)   Sale of entire portfolio consequent to a decision to exit the line of business completely;
(e)      Consortium and syndication arrangements and arrangement under CDR mechanism;

(f)     Any other arrangement/, specifically exempted by RBI.

Credit Card Accounts
A credit card account will be treated as NPA if the minimum amount due, is not paid fully within 90 days from the next statement date. The gap between two statements should not be more than a month.

PROVISIONING NORMS

General

The primary responsibility for making adequate provisions is that of the bank managements and the statutory auditors. Provisions should be made on the basis of classification of assets. Banks should make provision against substandard, doubtful and loss assets as below:

Loss assets
Loss assets should be written off. If these are permitted to remain in the books, 100% of the outstanding should be provided for.

Doubtful assets
100% of the amount which is not covered by the realisable value of security.

Provision for secured portion may be made on the following basis:
Period for which the advance
remained in ‘doubtful’ category
Provision
(%)
Up to one year
25
One to three years
40
More than three years
100

Note:   Valuation of Security for provisioning purposes
In cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external agencies would be mandatory. Charged Immovable properties should be got valued once in three years.

Substandard assets

(i)                 A general provision of 15 % on total outstanding should be made.
(ii)               The ‘unsecured exposures’ would attract provision of 25% on the outstanding balance. Infrastructure exposure will attract a provisioning of 20%. Unsecured exposure is an exposure where the realisable value of the security is not more than 10%, ab-initio, of the outstanding funded as well as non funded exposure.

(iii) The following would be applicable from the financial year 2009-10 onwards:
a)         Rights, licenses, authorisations, etc., charged to the banks, should not be reckoned as tangible security.

b)   However, banks may treat annuities under build-operate-transfer (BOT) model in respect of road / highway projects and toll collection rights, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities subject to the condition that banks' right to receive annuities and toll collection rights is legally enforceable and irrevocable.

c)    In case of PPP projects, the debts due to the lenders may be considered as secured to the extent assured by the project authority in terms of the Concession Agreement, subject to the following conditions :

i)   User charges / toll / tariff payments are kept in an escrow account where senior lenders have priority over withdrawals;

ii)  There is sufficient risk mitigation, such as pre-determined increase in user charges or increase in concession period, in case project revenues are lower than anticipated;

iii)  The lenders have a right of substitution in case of concessionaire default;

iv)  The lenders have a right to trigger termination in case of default in debt service; and

v) Upon termination, the Project Authority has an obligation of (i) compulsory buy-out and (ii) repayment of debt due in a pre-determined manner.

d) Banks should disclose the amount of advances for which intangible securities has been taken as also the estimated value of such intangible collateral.

Standard assets

(i)                  Banks should make general provision at the following rates for the funded outstanding on global loan portfolio basis:

(a)                Farm Credit and SME sectors at 0.25%;
(b)                advances to Commercial Real Estate (CRE) Sector at 1.00 per cent;
(c)                advances to Commercial Real Estate – Residential Housing Sector (CRE - RH) at 0.75%
(d)                all other loans and advances not included in (a) (b) and (c) above at 0.40 per cent.

(ii)       The provisions on standard assets should not be reckoned for arriving at net
NPAs.

(iii)      The   provisions towards Standard   Assets need   not   be   netted   from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet.

(iv) It is clarified that the Medium Enterprises will attract 0.40% standard asset provisioning.

For this purpose, CRE-RH would consist of loans to builders/developers for residential housing projects (except for captive consumption) under CRE segment. Integrated housing projects comprising of some commercial space can also be classified under CRE-RH, provided that the commercial area in the residential housing project does not exceed 10% of the total Floor Space Index (FSI) of the project.

(v)               The provisions rendered surplus over the level as on November 15, 2008 should not be reversed to Profit and Loss account. In case of shortfall, the balance should be provided for by debit to Profit and Loss account.

(vi) Banks are required to estimate the risk of unhedged position of their borrowers and make incremental provisions on their exposures to such entities:

Likely Loss / EBID (%)
Incremental Provisioning Requirement
Upto 15 per cent
0
More than 15 %and upto 30 per cent
20bps
More than 30 %and upto 50 per cent
40bps
More than 50 %and upto 75 per cent
60bps
More than 75 per cent
80 bps


Prudential norms on creation and utilisation of floating provisions

Principle for creation of floating provisions by banks
The bank should hold floating provisions for ‘advances’ and ‘investments’ separately and the guidelines will be applicable to floating provisions held for both portfolios.

Principle for utilisation of floating provisions by banks
i           The floating provisions should not be used for making specific or regulatory provisions for standard assets. It can be used only for contingencies under board approved extraordinary circumstances for making specific provisions in impaired accounts with prior permission of RBI.

ii         Extra-ordinary circumstances refer to losses which do not arise in the normal course of business. These circumstances fall under three categories viz. General, Market and Credit. Under general category, there can be situations losses due to civil unrest or collapse of currency, natural calamities, pandemics etc. Market category would include a general melt down in the markets. Among the credit category, only exceptional credit losses would be considered as an extra-ordinary circumstance.

Accounting
Floating provisions cannot be reversed to P&L. They can only be utilised for making specific provisions in extraordinary circumstances. Until such utilisation, these provisions can be netted off from gross NPAs to arrive at net NPAs. Alternatively, they can be treated as Tier II capital within the overall ceiling of 1.25 % of total risk weighted assets.

Disclosures
Banks should make comprehensive disclosures on floating provisions in the “notes on accounts” to the balance sheet on
(a) opening balance in the floating provisions account,
(b) the quantum of floating provisions made in the accounting year,
(c) purpose and amount of draw down made during the accounting year, and
(d) closing balance in the floating provisions account.

Additional Provisions for NPAs at higher than prescribed rates
The norms for provisioning represent the minimum requirement. Bank may voluntarily make higher provisions provided such higher rates are consistently adopted from year to year. Such additional provisions are not to be considered as floating provisions and may be netted off from gross NPAs to arrive at the net NPAs

Provisions on Leased Assets
i)                    Substandard assets
a)                  15 % of the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge component.
b)                  Unsecured lease exposures would attract a provision of 10%.
ii)                  Doubtful assets
100 % of the unsecured portion plus provision at the following rates on the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge component of the secured portion, depending upon the period for which asset has been doubtful:

Period for which the advance has
remained in ‘doubtful’ category
Provision
requirement (%)
Up to one year
25
One to three years
40
More than three years
100
iii)                Loss assets
The entire asset should be written off or else100 % of the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge component should be provided for.

Guidelines for Provisions under Special Circumstances

Advances granted under rehabilitation packages approved by BIFR/TLI
(i)     The provision should continue to be made as per their classification.

(ii) Provision on additional facilities need not be made for a period of one year from the date of disbursement.

(iii) No provision is required for a period of one year in respect of additional credit facilities granted to sick SSI units, where rehabilitation packages have been drawn by the banks,

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, gold ornaments, government & other securities and life insurance policies would attract provisioning as per their asset classification status.

Treatment of interest suspense account
Provision should be made on the amount of advance after deducting the balance held in Interest Suspense account.

Advances covered by ECGC guarantee
Provision should be made only for the balance in excess of the amount guaranteed by the Corporation and realizable value of security.

Advance covered by guarantees of CGTMSE or CRGFTLIH
The amount outstanding in excess of the guaranteed portion should only be provided for.

Takeout finance
The lending institution should make provisions against a 'takeout finance' turning into NPA pending its takeover by the taking-over institution. As and when the asset is taken-over by the taking-over institution, the corresponding provisions could be reversed.

Reserve for Exchange Rate Fluctuations Account (RERFA)
When exchange rate movements turn adverse, the outstanding amount of overdue foreign currency denominated loans, goes up correspondingly and so does the provisioning requirements. Such assets need not be revalued but in case it is required to do so, the following procedure may be adopted:
Ø  Loss due to revaluation has to be booked in the bank's Profit & Loss Account.
Ø    In addition to the normal provisioning, Gain due to revaluation should be used to make provisions against the corresponding assets.

Provisioning for country risk
Wef March 31, 2003, Banks shall make provisions on the net funded country exposures on a graded scale ranging from 0.25 to 100% according to the risk categories mentioned below:           
Risk category
ECGC Classification
Provisioning Requirement
Insignificant
A1
0.25%
Low
A2
0.25%
Moderate
B1
5%
High
B2
20%
Very high
C1
25%
Restricted
C2
100%
Off-credit
D
100%
Ø  Banks are required to make provision for country risk in respect of a country where its net funded exposure is one% or more of its total assets.
Ø  Provision for country risk shall be in addition to the normal provisions subject to a maximum of 100%.
Ø  The exposures of foreign branches of Indian banks should be included. Foreign banks shall compute the country exposures of their Indian branches and shall hold appropriate provisions in their Indian books.
Ø  Banks may make a lower level of provisioning in respect of short-term exposures.

Excess Provisions on sale of Standard Asset / NPAs
(a)          Where the sale consideration is higher than the book value in respect of Standard Asset, the excess provisions may be credited to Profit and Loss Account.

(b)        Excess provisions that arise on sale of NPAs would be eligible for Tier II status as per Basel III Capital Regulations.

Provisions for Diminution of Fair Value
Provisions for diminution of fair value of restructured advances, made on account of reduction in rate of interest and/or reschedulement are permitted to be netted from the relative asset.

Provisioning norms for Liquidity facility provided for Securitisation transactions
The amount of liquidity facility drawn and outstanding for more than 90 days, in respect of securitisation transactions should be fully provided for.

Provisioning requirements for derivative exposures
Credit exposures computed as per the current marked to market value of the contract, (arising on account of the interest rate & foreign exchange derivative transactions, credit default swaps and gold) shall also attract provisioning requirement as applicable to the 'standard' assets, of the concerned counterparties.

Provisioning for housing loans at teaser rates
The standard asset provisioning on the amount of teaser loans has been increased from 0.40% to 2.00%. The provisioning on these assets would revert to 0.40% after 1 year from the date on which the rates are reset, if the accounts remain ‘standard’.

Provisioning Coverage Ratio
i.                    Provisioning Coverage Ratio (PCR) is essentially the ratio of provisioning to gross NPAs.
ii.                  It was decided that banks should augment their provisioning against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio is not less than 70 per cent. Accordingly, banks were advised to achieve this norm not later than end-September 2010.

iii.                   Majority of the banks had achieved PCR of 70 % and had represented to RBI whether the prescribed PCR is required to be maintained on an ongoing basis. Banks were advised that :
a)   the PCR of 70 % may be with reference to the gross NPA position in banks as on September 30, 2010;
b)    the surplus of the provision over normal requirement should be segregated into an account styled as “countercyclical provisioning buffer”,
c)     this  buffer  will  be  allowed  to  be  used  by  banks  for  making  specific
provisions for NPAs during periods of system wide downturn.

iv.                The PCR should be disclosed in the Notes to Accounts to the Balance Sheet.

v.                  Banks are required to build up ‘Dynamic Provisioning Account’ during good times and utilise the same during downturn. Dynamic loan loss provisioning framework is expected to be in place with improvement in the system. Meanwhile, banks should develop necessary capabilities to compute their long term average annual expected loss for different asset classes, for switching over to the dynamic provisioning framework.


Guidelines on sale of financial assets to Securitisation Company (SC)/ Reconstruction Company (RC) and related issues

Scope
These guidelines would be applicable to sale of financial assets by banks/ FIs, for asset reconstruction/ securitisation.

Structure
The guidelines to be followed while selling their financial assets to and investing in bonds/ debentures/ security receipts offered by the SC/RC are given below. The prudential guidelines have been grouped under the following headings:
i)        Financial assets which can be sold.
ii)      Procedure for   sale including valuation and pricing aspects.
iii)    Prudential norms in the  following  areas for sale of financial   assets and   for   investing in securities offered as compensation consequent upon sale of financial assets:
a)                   Provisioning / Valuation norms
b)                  Capital adequacy norms
c)                   Exposure norms

iv)    Disclosure requirements

Financial assets which can be sold
A financial asset may be sold to the SC/RC by any bank/ FI where the asset is:

i)                    A NPA, including a non-performing bond/ debenture.
ii)                  A Standard Asset where:
(a)                the asset is under consortium/ multiple banking arrangements,
(b)               at least 75% by value of the asset is classified as NPA in the books of other banks/FIs, and
(c)                at least 75% (by value) of the banks / FIs who are under the consortium / multiple banking arrangements agree to the sale of the asset to SC/RC.
iii)               An asset reported as SMA-2 by the bank / FI to Central Repository for Information on Large Credit (CRILC)

Procedure    for    sale, including valuation and pricing aspects

(a)                SARFAESI Act allows acquisition of financial assets by SC/RC from any bank/ FI on ‘without recourse’ basis as well as on ‘with recourse’ basis. Banks/ FIs are, to ensure that consequent to sale the financial assets should be taken off the books of the bank/ FI.

(b)               Banks/ FIs, which propose to sell their financial assets should ensure that the sale is conducted in a prudent manner in accordance with policy. The Board shall lay down policies and guidelines covering, inter alia,
i.        Financial assets to be sold;
ii.      Norms and procedure for sale of such financial assets;
iii.    Valuation procedure to be followed to ensure that the realisable value of financial assets is reasonably estimated;
iv.    Delegation of powers of functionaries for taking decision on sale etc.

(c)                Banks/ FIs should ensure that after sale of the financial assets, they do not assume any operational, legal or any other type of risks relating to those assets.

(d)          (i) Each bank / FI will make its own assessment of the value offered by
the SC / RC for the financial asset and decide whether to accept or not.

(ii)In the case of consortium / multiple banking arrangements, if 75% (by value) of the banks / FIs decide to accept the offer, the others will be obligated to accept the offer.

(iii) Under no circumstances can a transfer to the SC/ RC be made at a contingent price.

(iv)    Banks using auction process for sale of NPAs to SCs / RCs should be transparent. If a bid received is above the Reserve Price and a minimum of 50% of sale proceeds is in cash, and also fulfills the other conditions specified in the Offer Document, acceptance of that bid would be mandatory.

(e)                Banks/ FIs may receive cash or bonds or debentures as sale consideration for the financial assets sold to SC/RC.

(f)                 Bonds/ debentures received by banks/ FIs as sale consideration will be classified as investments in the books of banks/ FIs.

(g)                Banks may also invest in security receipts, Pass-through certificates (PTC), or other bonds/ debentures issued by SC/RC. These securities will be classified as investments in the books of banks/ FIs.

(h)                In cases of specific financial assets, banks/ FIs may enter into agreement with SC/RC to share, any surplus realised by SC/RC on the eventual realisation of the concerned asset.

Prudential norms for banks/ FIs for the sale transactions
(A)              Provisioning/ valuation norms
(a)       (i) When a bank sells its financial assets, such assets will be removed from its books.

(ii) If the sale is at a price below the net book value, the shortfall should be debited to the P&L account of that year. Banks can also use countercyclical / floating provisions for meeting such shortfall.
However, for assets sold between February 26, 2014 and March 31, 2016, banks can spread over the shortfall over a period of two years.

(iii)                      If the sale value is higher than the NBV, Banks may reverse the excess provision to its P&L account of the year of receipt. Reversal of excess provision will be limited to the extent to which cash received exceeds the NBV of the asset.
When banks/ FIs invest in the security receipts/ pass-through certificates, the sale shall be recognised at the lower of the redemption value of such investments and the NBV of the financial asset.

(b)   The securities (bonds and debentures) offered by SC / RC should satisfy the        following conditions:

(i)     The securities must not have a term in excess of six years.
(ii)   The securities must carry a rate of interest which is not lower than 1.5% above the Bank Rate in force at the time of issue.
(iii) The securities must be secured by an appropriate charge on the assets transferred.
(iv) The securities must provide for part or full prepayment in the event the SC / RC sells the asset securing the security before the maturity date of the security.

            (v). The commitment of the SC / RC to redeem the securities must be
       unconditional and not linked to the realization of the assets.
(vi) Whenever the security is transferred to any other party, notice of transfer should be issued to the SC/ RC.

(c)             Investment in debentures/ bonds/ security receipts/ Pass-through certificates issued by SC/ RC

All instruments received by banks as sale consideration will be in the nature of non SLR securities. Accordingly, norms applicable to investment in non-SLR instruments would be applicable to such instruments too. However, if any of the above instruments is limited to the actual realisation of the financial assets assigned, the bank shall reckon the Net Asset Value (NAV), obtained from SC/RC from time to time, for valuation of such investments.

(B)               Exposure Norms
Banks’ investments in instruments issued by a SC/RC will constitute exposure on the SC/RC. As only a few SC/RC are being set up now, banks’ exposure may go beyond their prudential exposure ceiling. Therefore in the initial years, banks/ FIs will be allowed to exceed prudential exposure ceiling on a case-to-case basis.

Disclosure Requirements
i) Banks/ FIs, which sell their financial assets, shall be required to make the following disclosures in the Notes on Accounts to their Balance sheets:

Details of financial assets sold during the year to SC/RC for Asset Reconstruction

a.                   No. of accounts
b.                   Aggregate value (net of provisions) of accounts sold to SC / RC
c.                   Aggregate consideration
d.                   Additional consideration realized in respect of accounts transferred in earlier years
e.                   Aggregate gain / loss over net book value.

iii)    In addition to the above disclosures, banks shall make the following disclosures in the Notes to Accounts in their Annual Financial Statements:
                                                                                               (In Rs. Crore)
Particulars
Backed by NPAs
sold by the bank as
underlying
Backed by NPAs sold by other banks/ FIs/ NBFCs as underlying
Total
Previous Year
Current Year
Previous Year
Current Year
Previous Year
Current Year
Book value of
investments in security
receipts







Related Issues

(a)                SC/ RC will also take over financial assets which cannot be revived and therefore, will have to be disposed off on a realisation basis.

(b)               In such cases, the assets will not be removed from the books of the bank/ FI but realisations as and when received will be credited to the asset account. Provisioning for the asset will continue to be made by the bank / FI in the normal course.


Guidelines on purchase/ sale of Non - Performing Financial Assets (other than to SC/RC)

Scope

These guidelines would be applicable to banks, FIs and NBFCs purchasing/ selling NPA, from/ to other banks/FIs/NBFCs (excluding securitisation companies/ reconstruction companies).

The reference to ‘bank’ in the guidelines on purchase/sale of NPA would include financial institutions and NBFCs.

Structure
The guidelines have been grouped under the following headings:
i)                    Procedure for purchase/ sale of NPA by banks, including valuation and pricing aspects.

ii)                  Prudential norms, in the following areas, for banks for purchase/ sale of NPA:

a)                  Asset classification norms
b)                  Provisioning norms
c)                  Accounting of recoveries
d)                  Capital adequacy norms
e)                   Exposure norms

iii)                Disclosure requirements


Procedure for purchase/ sale of NPA, including valuation and pricing aspects

i) Bank should ensure that the purchase/ sale is conducted in accordance with a policy approved by the Board. The Board shall lay down policies and guidelines covering, inter alia,
a)                  NPA that may be purchased/ sold;
b)                  Norms and procedure for purchase/ sale;
c)                  Valuation procedure to be followed;
d)                  Delegation of powers of various functionaries.
e)                   Accounting policy

ii) The Board should also ensure that there is adequate skills and appropriate systems and procedures are in place to effectively address the risks.

iii)                Banks should work out the NPV of the estimated cash flows associated with the realisable value of the securities net of the cost of realisation. The sale price should generally not be lower than such NPV.

iv)                The estimated cash flows are normally expected to be realised within a period of three years and at least 10% of which should be realized in the first year and at least 5% in each half year thereafter.

v)                  A bank may purchase/sell NPA only on ‘without recourse’ basis. Selling bank shall ensure that subsequent to sale, the financial assets should be taken off the books of the bank.

vi)                Banks should ensure that subsequent to sale, they do not have any involvement with reference to assets sold and do not assume operational, legal or any other type of risks.

vii)              Each bank will make its own assessment of the value offered by the purchasing bank and decide whether to accept or reject the offer.

viii)            Under no circumstances can a sale to other banks be made at a contingent price.

ix) Banks shall sell NPA to other banks only on cash basis..

(x) Banks are permitted to sell/buy homogeneous pool of retail NPA, on a portfolio basis which would be treated as a single asset in the books of the purchasing bank.

xi)       A non performing financial asset should be held by the purchasing bank in its books at least for a period of 12 months before it is sold to other banks. Banks should not sell such assets back to the bank, which had sold the NPA.

xii)  The selling bank shall pursue the staff accountability aspects as per the existing instructions in respect of the NPAs sold to other banks.

Prudential norms for banks for the purchase/ sale transactions

(A)              Asset classification norms
(i) The NPA may be classified as ‘standard’ in the books of the purchasing bank for a period of 90 days from the date of purchase. Thereafter, the asset classification status shall be determined by the record of recovery.

(ii) The asset classification status of an existing exposure to the same obligor in the books of the purchasing bank will continue to be governed by the record of recovery of that exposure.
(iii) Where the purchase/sale does not satisfy any of the prudential requirements, the asset classification status in the books of the purchasing bank shall be the same as in the books of the selling bank. Thereafter, the asset classification status will continue to be determined with reference to the date of NPA in the selling bank.

(iv) Any restructure of the repayment schedule by the purchasing bank shall render the account as a NPA.

(B)       Provisioning norms

Books of selling bank
i)                    When a bank sells its NPA to other banks, the same will be removed from its books on transfer.

ii)                  If the sale is at a price below the net book value (NBV), the shortfall should be debited to the profit and loss account of that year.

iii)                If the sale is for a value higher than the NBV, the excess provision will be utilised to meet the shortfall on account of sale of other assets.

Books of purchasing bank
Provisioning requirement will be as per its asset classification in the books of the purchasing bank.

(C)              Accounting of recoveries
Any recovery in respect of a NPA purchased should first be adjusted against its acquisition cost. Recoveries in excess of the acquisition cost can be recognised as profit.

(D)              Capital Adequacy
Banks should assign 100% risk weights to the NPA purchased from other banks. In case the NPA purchased is an investment, then it would attract capital charge for market risks also.

(E)               Exposure Norms
Purchasing bank should ensure compliance with the credit exposure ceilings after reckoning the exposures to the obligors arising on account of the purchase.

Disclosure Requirements

Banks which   purchase   NPA  from   other banks shall  be  required  to  make  the  following disclosures in  the  Notes on Accounts to their Balance sheets:

A.                  Details of NPA purchased:
(Amounts in Rupees crore)

1.                  (a)No. of accounts purchased during the year
(b)               Aggregate outstanding
2.                  (a)Of these, number of accounts restructured during the year
(b)                Aggregate outstanding


B.                   Details of NPA sold:
(Amounts in Rupees crore)

1.                  No. of accounts sold
2.                  Aggregate outstanding
3.                   Aggregate consideration received


C. The purchasing bank shall furnish all relevant reports regarding NPA purchased to RBI and CICs which has obtained Certificate of Registration from RBI and of which the bank is a member.

Writing off of NPAs

In terms of Section 43(D) of the Income Tax Act 1961, income by way of interest in relation to such categories of bad and doubtful debts as may be prescribed, shall be chargeable to tax in the previous year in which it is credited to the bank’s profit and loss account or received, whichever is earlier.

Amounts set aside for making provision for NPAs as above are not eligible for tax deductions.

Therefore, the banks should either make full provision or write-off such advances and claim tax benefits. Recoveries made  in  such  accounts should  be  offered  for  tax purposes as per the rules.

Write-off at Head Office Level
Banks may write-off advances at Head Office level, even though the relative advances are still outstanding in the branch books.

NPA Management – Requirement of Effective Mechanism and Granular Data

(i)   Banks should put in place a robust MIS mechanism for early detection of signs of distress at individual account level as well as at segment level.

(ii)   The banks' IT and MIS system should be robust and able to generate reliable and quality information with regard to their asset quality for effective decision making.

Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries (Loans sanctioned after July 15, 2014)

RBI has clarified that it would not have any objection to banks’ financing of long term projects in infrastructure and core industries sector having the following features:

i. The fundamental viability of the project would be established on the basis of all requisite financial and non-financial parameters;

ii.                  Allowing longer tenor amortisation of the loan with periodic refinancing of balance debt. The tenor could be fixed at the time of each refinancing, within the overall amortisation period;

iii.                This would mean that the bank, while assessing the viability of the project, would be allowed to accept the project as viable where the average DSCR and other parameters are acceptable over a longer amortisation period, but provide funding for only, say, 5 years with refinancing of balance debt being allowed by existing or new banks or even through bonds;

iv.                 The refinancing after each of these 5 years would be of the reduced amounts determined as per the Original Amortisation Schedule.

The banks’ financing of project loans with the features above will, however be subject to the following conditions:

i.                     Only term loans to infrastructure projects and projects in core industries sector, included in the Index of Eight Core Industries will qualify for such refinancing;

ii.                   At the time of initial appraisal of such projects, banks may fix an amortisation schedule while ensuring that the cash flows and all necessary parameters are robust even under stress scenarios;

iii.                 The tenor of the Amortisation Schedule should not be more than 80% of the initial concession period in case of infrastructure projects under PPP model; or
80% of the initial economic life envisaged at the time of project appraisal in case of non-PPP infrastructure projects; or
80% of the initial economic life envisaged at the time of project appraisal by Lenders Independent Engineer in the case of other core industries projects;

iv.                The bank offering the Initial Debt Facility may sanction the loan for a medium term, say 5 to 7 years. The repayment at the end of this period could be structured as a bullet repayment, with a prior arrangement that it will be refinanced. That refinance may be taken up by the same lender or a set of new lenders, or by issue of corporate bond, as Refinancing Debt Facility, and such refinancing may repeat till the end of the Amortisation Schedule;

v.                  The repayment schedules of Initial Debt Facility should normally correspond to the Original Amortisation Schedule, unless there is an extension of DCCO. In such cases the consequential shift in repayment schedule would not be considered as restructuring provided all other terms and conditions remain unchanged or are enhanced to compensate for the delay and the entire project debt amortisation is scheduled within 85% of the initial economic life of the project;

vi.                The Amortisation Schedule of a project loan may be modified once during the course of the loan (after DCCO) based on the actual performance in comparison to the assumptions made during the financial closure without being treated as‘restructuring’ provided:
a)   The loan is a standard loan as on the date of change of Amortisation Schedule;
b)     Net present value of the loan remains the same before and after the change in   Amortisation Schedule; and
c)   The entire outstanding debt amortisation is scheduled within 85% of the economic life of the project;

vii.               If the Initial Debt Facility or Refinancing Debt Facility becomes NPA at any stage, further refinancing should stop and the bank which holds the loan would classify the account as NPA and make necessary provisions. Once the account is upgraded, it will be eligible for refinancing;

viii.             Banks may determine the pricing of the loan commensurate with the risk, and such pricing should not be below the Base Rate;

ix.                 Banks should secure their interest by way of proper documentation and security creation, etc;

x.                   Banks will be initially allowed to count the cash flows from periodic amortisations of loans as also the bullet repayment of the outstanding debt at the end of each refinancing period for their ALM; however, with experience gained, banks will be required to conduct behavioural studies of cash flows and plot them accordingly in ALM statements;

xi.                 Banks should consider the probability that the loan will not be refinanced by other banks, and should take this into account when estimating liquidity needs as well as stress scenarios. Further, unless the part or full refinancing by other banks is clearly identified, the cash flows from such refinancing should not be taken into account for computing liquidity ratios; and

xii.               Banks should have a Board approved policy for such financing.



Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries (Loans sanctioned before July 15, 2014)

Banks may also flexibly structure the existing project loans sanctioned before July 15, 2014 to infrastructure projects and core industries projects with the option to periodically refinance the same as per the norms given below:

i.                    Only term loans to projects, in which the aggregate exposure exceeds Rs.500 crore, in the infrastructure sector and in the core industries sector will qualify for such flexible structuring and refinancing;

ii.                  Banks may fix a Fresh Loan Amortisation Schedule for the existing project loans once during the life time of the project after DCCO, based on the reassessment of the project cash flows, without this being treated as ‘restructuring’ provided:
a)   The loan is a standard loan as on the date of change of loan amortisation schedule;
b)   NPV of the loan remains same before and after the change in loan amortisation schedule;
c)   The Fresh Loan Amortisation Schedule should be within 85% of the initial concession period in case of infrastructure projects under PPP model; or
   85 %of the initial economic life envisaged at the time of project appraisal in case of non-PPP infrastructure projects; or
   85 %of the initial economic life envisaged at the time of project appraisal by Lenders Independent Engineer in the case of other core industries projects; and

d)   The viability of the project is reassessed by the bank and vetted by the Independent Evaluation Committee.

iii. If a project loan is classified as ‘restructured standard’ asset as on the date of fixing the Fresh Loan Amortisation Schedule, the loan should continue to be classified as ‘restructured standard’ asset. However the Fresh Loan Amortisation Schedule may not be treated as an event of ‘repeated restructuring’. Upgradation of such assets would be governed by the prudential guidelines on restructuring;

iv.                 Any subsequent changes to the above mentioned Fresh Loan Amortisation Schedule will be governed by the extant restructuring norms;

v.                   Banks may refinance the project term loan periodically (say 5 to 7 years) after the project has commenced commercial operations. The repayment at the end of each refinancing period could be structured as a bullet repayment, with a prior arrangement that it will be refinanced. The refinance may be taken up by the same lender or a set of new lenders or by issue of corporate bond, as refinancing debt facility, and such refinancing may repeat till the end of the Fresh Loan Amortisation Schedule. The provision regarding NPV would not be applicable at the time of periodic refinancing;

vi.                 If the project term loan or refinancing debt facility becomes a NPA at any stage, further refinancing should stop and the bank would have to recognise the loan as such and make necessary provisions. Once the account upgrades, it will be eligible for refinancing;

vii.               Banks may determine the pricing of the loans, commensurate with the risk, and such pricing should not be below the Base Rate;

viii.             Banks should secure their interest by way of proper documentation and security creation, etc.;

ix.                 Banks will be initially allowed to count the cash flows from periodic amortisations of loans and the bullet repayment, for their ALM; however, banks will be required in due course to conduct behavioural studies of cash flows and plot them accordingly in ALM statements;

xi.                Banks should recognise that there will be a probability that the loan will not be refinanced by other banks, and should take this into account when estimating liquidity needs as well as stress scenarios;

Banks may also provide longer loan amortisation as per the above framework to existing project loans which are classified as ‘NPAs’. However, such an exercise would be treated as ‘restructuring’ and the assets would continue to be treated as ‘NPA’. Such accounts may be upgraded only when the account performs satisfactorily during the ‘specified period’. However, periodic refinance facility would be permitted only when the account is classified as ‘standard’.

It is reiterated that the exercise of flexible structuring and refinancing should be carried out only after DCCO.

Refinancing of Project Loans

A restructured account is one where the bank, due to 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. Thus, any change in repayment schedule will render it as restructured account.

Banks can refinance their existing infrastructure project loans by entering into take-out financing agreements with any financial institution on a pre-determined basis. If there is no pre-determined agreement, a standard account in the books of a bank can still be taken over by other banks/FIs,

Banks are advised that if they refinance any existing infrastructure and other project loans by way of take-out financing, even without a pre-determined agreement, and fix a longer repayment period, the same would not be considered as restructuring if the following conditions are satisfied:

i           Such loans should be ‘standard’ in the books of the existing banks, and should have not been restructured in the past.
ii         Such loans should be substantially taken over (more than 50%) from the existing financing banks/Financial institutions.
iii       The repayment period should be fixed by taking into account the life cycle of the project and cash flows from the project.

In respect of existing project loans, where the aggregate exposure is Rs.1,000 crore or more; banks may refinance such loans by way of full or partial take-out financing, even without a pre-determined agreement, and fix a longer repayment period, without treating the exercise as restructuring, if the following conditions are satisfied:

i.            The project should have started commercial operation after achieving Date of Commencement of Commercial Operation (DCCO);
ii.            The repayment period should be fixed by taking into account the life cycle of and cash flows from the project. Further, the total repayment period should not exceed 85% of the initial economic life of the project / concession period in the case of PPP projects;
iii.           Such loans should be ‘standard’ in the books of the existing banks at the time of the refinancing;
iv.           In case of partial take-out, a significant amount of the loan (a minimum 25%) should be taken over by a new set of lenders; and
v.            The promoters should bring in additional equity, if required.
vi.           The above facility will be available only once during the life of the existing project loans.

A lender who has extended only working capital finance for a project may be treated as 'new lender' for taking over a part of the project term loan.

Financing of Cost Overruns for Projects under Implementation

Project finance lenders sanction a ‘standby credit facility’ to fund cost overruns if needed. Such cost overruns are taken into account while determining the ratios. Such facilities rank pari passu with base project loans with the same repayment schedule.

In cases where banks have specifically sanctioned a ‘standby facility’, they may fund cost overruns as per the agreed terms and conditions.

Where such financing of cost overruns is not envisaged, banks may fund cost overruns, which may arise on account of extension of DCCO, without treating the loans as ‘restructured asset’ subject to the following conditions:

i) Banks may fund additional ‘Interest During Construction’, which may arise on account of delay in completion of a project;
ii)  Other cost overruns up to a maximum of 10% of the original project cost;
iii)  The Debt Equity Ratio should remain unchanged subsequent to funding cost overruns or improve in favour of the lenders and the revised Debt Service Coverage Ratio should be acceptable to the lenders;
iv) Disbursement of funds for cost overruns should start only after the Promoters bring in their share of funding of the cost overruns; and
v) All other terms and conditions of the loan should remain unchanged or enhanced in favour of the lenders.

The ceiling of 10% of the original project cost is applicable to financing of all other cost overruns, including those on account of fluctuations in the value of Indian Rupee against other currencies, arising out of extension of DCCO.

Prudential Norms relating to Refinancing of Exposures to Borrowers

A. Repayment/refinancing of rupee loans with foreign currency borrowings/export advances will be subject to the following conditions:

a)                   If the foreign currency borrowings/export advances, are obtained from lenders who are not part of the Indian banking system without any support from the Indian banking system, the same may be utilised to refinance/repay loans.

b)                  If the foreign currency borrowings/export advances are obtained:
(i)                  from lenders who are part of Indian banking system; or
(ii)                with support from the Indian banking system; then the refinance shall be treated as ‘restructuring’, if the above borrowings/export advances are extended to a borrower who is under financial difficulty and involve concessions that the bank would otherwise not consider.

B.   Further repayment/refinancing of foreign currency borrowings outstanding with a bank, by way of rupee loans or another foreign currency loan or based on support from lenders who are part of Indian banking system would also be governed by the prudential guidelines.
C.   Non-Exhaustive Indicative List of Signs of Financial Difficulty

·      Continuous irregularities in cash credit/overdraft accounts;
·      Repeated undue delay in making timely payment of instalments;
·      Undue delay in meeting commitments towards payments of installments due, crystallized liabilities under LC/BGs, etc.
·      Continuing inability to adhere to financial loan covenants;
·      Failure to pay statutory liabilities, non- payment of bills to suppliers of raw materials, water, power, etc.;
·      Non-submission or undue delay in submission or submission of incorrect stock statements and other control statements, delay in publication of financial statements and excessively qualified financial statements;
·      Delay in project implementation;
·      Downward migration of internal/external ratings/rating outlook.

Based on the Master Circular of 1/7/15.

Please visit www.rbi.org.in if required………………….. Poppy