Banks and financial institutions could see a rush from corporate and small and medium enterprises to restructure loans in the next two years.
The reason: Reserve Bank of India is likely to do away with regulatory forbearance for restructuring after two years.
Regulatory forbearance here refers to relaxations given with regard to loan classification (standard/sub-standard/doubtful/loss) and the amount of capital that banks have to set aside when a loan turns bad.
Once the RBI disallows regulatory forbearance, banks may balk at restructuring loans as they will not have the benefit of relaxed asset classification and provisioning norms, say bankers.
The RBI working group, which is working at aligning prudential guidelines on restructuring of loans in India with international prudential measures, has said that in view of the current domestic and global economic situation, the RBI may get banks to adopt the global best practices on loan restructuring after two years.
In the interim, the central bank may tighten provisioning norms for banks; restrict roll over of short-term loans to no more than two-three 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 recognising the impairment in asset quality.
The working group has recommended a gradual and calibrated approach to recognition of impairment and strengthening of provisioning in view of the current economic situation.
The group has recommended stepping up provisioning (setting aside capital) on accounts which are classified as standard on restructuring to five per cent from the present two per cent to recognise the inherent risks of such accounts falling back into the NPA category.
The increase in provisioning may be made applicable with immediate effect in cases of new restructuring.
The time span for turning around loan accounts undergoing restructuring in the infrastructure and non-infrastructure sectors should be eight years (against 10 years now) and five years (seven years), respectively.
To ensure promoters ‘skin in the game’ or commitment to the restructuring package, the group recommended that obtaining their personal guarantee should be mandatory for all cases of restructuring.