A Reserve Bank panel has recommended banks should seek personal guarantee from promoters and adopt a ‘carrot-and-stick policy’ while restructuring loans of corporates.

“As stipulating personal guarantee will ensure promoters’ skin in the game or commitment to the restructuring package, obtaining the personal guarantee of promoters be made a mandatory requirement in all cases of restructuring,” the panel said in its report.

The RBI had in January set up the panel to review the existing prudential guidelines on restructuring of advances by banks and financial institutions and suggest modifications taking into account the best international practices and accounting standards.

The panel, which is headed by RBI Executive Director, Mr B Mahapatra, said corporate guarantee should not be considered as a substitute for the promoters’ personal guarantee.

In cases where the restructuring package could not be implemented due to promoters’ non—adherence to terms and conditions, the banks should exercise exit option at the earliest with a view to minimise the losses, the report said.

“The terms and conditions of restructuring should inherently contain the principle of ‘carrot and stick’, i.e. while restructuring being an incentive for viable accounts, it should also have disincentives for non—adherence to the terms of restructuring and under—performance,” it said.

The panel further said that conversion of debt into preference shares should be done only as a last resort. Also, conversion of debt into equity/preference shares should be restricted to a cap (say 10 per cent of the restructured debt).

Conversion of debt into equity should be done only in the case of listed companies.

The banks should disclose all recast loans on books, and from hereon keep a 5 per cent provision for new standard loans recast, as against the existing norm of 2 per cent.

These provisions, it added, could be implemented over a period of two years.

(This article was published on July 20, 2012)
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