Posts
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.
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.
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:
|
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.
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
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:
(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.
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.
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
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;
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
No comments:
Post a Comment