The Hindu Business Line : Restructuring of loans: Auditors for separate disclosures in ‘notes’

Mumbai, April 1 “Give them an inch and they’ll take a mile,” is an old English idiom that Indian bankers’ are familiar with. Replace the word ‘them’ with ‘borrowers’ and the idiom is complete from bankers’ perspective.

Before the Reserve Bank of India prescribed March 31, 2009 deadline passed, banks received lakhs of applications for restructuring of advances from borrowers — some genuinely impacted by the global slowdown and yet others trying take advantage of the regulatory leeway — under the banking regulator’s prudential guidelines.

The number of ‘applications received but not processed’ reportedly surged in the case of public sector banks as many borrowers, be they from the corporate sector or the micro, small and medium enterprises, put in requests for restructuring in the last quarter of FY2009.

In view of the sheer number of ‘applications received but not processed’ cases, auditors feel that banks would do well to make separate disclosures in this regard in their notes to accounts for FY 2008-2009 as the eligibility or otherwise of many borrowers, who put in requests for restructuring just before the deadline expired, would not have been determined by banks by the time their accounts are finalised for FY2009.

“It is RBI’s prerogative to formulate guidelines for the banking sector. But as an auditor it is my responsibility to ensure that true and fair picture of the accounts is reflected. Since banks have received applications till March 31, 2009, for restructuring advances and they will not be in a position to process them to determine their eligibility/ ineligibility by the time the accounts are finalised, it would be better for them to make disclosures in this regard in the notes to accounts,” said Mr Jayant Gokhale, Member, Institute of Chartered Accountants of India, Central Council.

According to bankers, after the RBI issued its prudential guidelines on restructuring of advances by banks last year, borrowers whose accounts were classified as ‘standard’ as on September 1, 2008, began defaulting in order to take advantage of the restructuring package, entailing a one-year moratorium on payment of interest or reduction in interest, etc. Despite defaulting after this date, the accounts would continue to retain ‘standard’ classification if the borrower manages to convince the bank about the stress his/her business is facing on account of the global economic turmoil.

While borrowers can enjoy the fruits of restructuring, banks will end up making provisions for diminution in the fair value of restructured advances on account of reduction in the rate of interest and/ or reschedulement of the repayment of principal amount. Such diminution, according to RBI, in value is an economic loss for the bank and will have an impact on the bank’s market value of equity.

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