Clamping down on restructuring of loans by banks, the Reserve Bank of India today increased from June 1 the provisioning requirement for fresh standard restructured advances to 5 per cent from 2.75 per cent. For the existing stock of restructured assets, provisioning will be raised to 5 per cent in phases over three years.
According to the Reserve Bank of India’s new guidelines released on Thursday, banks will have to set aside Rs 5 for every Rs 100 restructured from next month.
Restructuring means mid-way through the repayment cycle, the terms of repayment are ease ( that is, interest rates are lowered, borrowers are given more time to repay).
The RBI move may provide more cushion to the banking system if the restructured accounts turn sour.
The central bank has, however, given more time to banks to increase their provisions on existing restructured accounts to five per cent. On existing restructured accounts, the banks will have to provide 3.5 per cent of the total amount from March 31, 2014. This will be subsequently increased to 5 per cent from March 31, 2016.
“Economy looks slow this year too and hence banks will have to provide more provisions. However, banks are making treasury profits in the current period and the RBI move may not have much adverse impact on the banks’ bottomline growth,” said V. R. Iyer, Chairperson and Managing Director, Bank of India.
CUTS TIME ON RECAST
The central bank has given banks eight years to ensure the accounts they restructure become viable again in eight years in the case of an infrastructure company, and in five years for other firms. Hitherto, they had 10 and seven years respectively.
The central bank also said it will not force banks to reclassify loans as non-performing in the event of project delays due to policy hurdles in the infrastructure and commercial real estate sectors.
PERSONAL GUARANTEE
Having learnt the hard way, the RBI has now told banks that promoters of a restructured company must bring in at least 20 per cent of the amount that banks sacrifice by way of repayment loss or 2 per cent of the total restructured debt, whichever is higher.
Also, the central bank has cautioned banks against taking corporate guarantee instead of promoters’ personal guarantee. “Personal guarantee should be obtained in all cases of restructuring… However, corporate guarantee can be accepted in those cases where the promoters of a company cannot be clearly identified,” the RBI said.