Restructuring of loans will become tougher, but not just yet.

A Working Group of the Reserve Bank of India has recommended doing away with the relaxations given on loan classification and the amount of capital that banks have to set aside when a loan is recast.

Technically, this is called regulatory forbearance given to recast loans.

The RBI is seeking to align prudential guidelines on restructuring of loans with international best practices.

Bank stocks took a beating after the draft guidelines on loan restructuring were unveiled. The BSE Bankex fell by 156 points (or by 1.28 per cent).

But in view of the difficult macroeconomic situation, the RBI group has suggested that banks can be asked to adopt the global best practices on loan restructuring after two years.

In the run up to this, the RBI may tighten provisioning norms for banks; restrict rollover of short-term loans to no more than 3 times, and set time limit for restructuring.

Further, banks have to ensure that borrowers chip in with higher equity contribution; get promoters ‘skin in the game’ or commitment to restructuring by stipulating personal guarantee; and be flexible with the ‘recompense’ clause.

Internationally, loans are generally treated as impaired/downgraded on restructuring.

However, in India standard advances can be restructured without their attracting the the impaired tag.

RBI data show that the restructured standard assets at Rs 97,834 crore in March 2010 and Rs 1,06,859 crore in March 2011 were higher than the gross non-performing assets (NPAs) of the banking system at Rs 81,816 crore and Rs 94,088 crore respectively during the respective period.

(This article was published on July 20, 2012)
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