RBI’s carrot & stick to tackle NPAs

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Provisioning norms raised steeply; debt recast only if promoters have more skin in the game

RBI’s carrot & stick to tackle NPAs
Shareholders of a bank will have to bear the first loss rather than the debt holder, if the lender’s non-performing assets mount. That’s the gist of a set of stringent guidelines the Reserve Bank of India (RBI) put out on Wednesday for banks to tackle their bad debt problems.

The guidelines make it mandatory to sell non-core assets in case of debt rest­ructuring, if the promoters have diversified their bu­siness leading to the st­ress. Promoters’ personal gu­arantees, too, will be a must for such restructuring.

The central bank steeply raised provisioning norms for substandard accounts, requiring banks to set aside larger capital as a provision against bad loans. For an unsecured debt that has turned doubtful for two years and is on the books of a bank for six months, the provisioning requirement will be 100 per cent, up from 40 per cent now. For all unsecured substandard loans, the provisioning will be 25 per cent, up from 15 per cent at present.

The guidelines are intended to facilitate a coordinated approach among the banks to tackle mounting bad debt on their books and revitalise distressed assets in the economy. The guidelines were drafted on the basis of a discussion paper put out by the central bank earlier and the responses received on it. The norms will come into force from April 1.

“We are trying to see how many stalled projects can be brought back to operation,” RBI governor Raghuram Rajan said after announcing the norms.

The gross non-performing assets (NPAs) of 40 listed banks shot up by 35.2 per cent, or Rs 63,386 crore, to over Rs 2.4 lakh crore in the nine months ending December 2013, showed a study by NPAsource.com, a firm that focuses on resolution of str­essed assets.

“By ensuring that there is more skin of promoters in the game, the lenders sh­ould restructure where th­ere is a possibility of tr­an­sferring equity of the company by the promoters to the lenders to compensate for their sacrifices; or promoters infusing more equity into their companies; or promoters transferring th­eir holdings to a security trustee or an escrow arr­angement till a turnaround in the company. This will enable a change in management control,” the central bank said in a release.

Any debt restructuring above Rs 100 crore will be undertaken by a joint lenders’ forum (JLF) by adopting a corrective action plan (CAP), the guidelines say. The lender with the highest exposure will convene the JLF as soon as the interest or the principal becomes overdue for 61 to 90 days, provided the aggregate exposure of the lenders in that account is Rs 100 crore and above.

Lenders also have the option of forming a JLF even when the aggregate exposure is less than Rs 100 crore, if the interest or principal is overdue for 30 to 60 days.

The JLF, the central bank says, has to arrive at an early and feasible solution to preserve the economic value of the underlying assets as well as the lenders’ loans. Banks under the JLF need to implement a rectification, which would involve obtaining a specific commitment from the borrower to regularise an account so that it comes out of stress and does not become an NPA.

The commitment should be supported with identifiable cash flows within the required time period and without involving any loss or sacrifice on the part of the existing lenders.

If the existing promoters are not in a position to bring in additional money or take any measure to regularise the account, JLF may explore the possibility of getting some other equity/strategic investors to the company in consultation with the borrower.

The measures are intended to turn around the company without any change in the terms and conditions of the loan. The JLF may also consider providing need-based additional finance to the borrower, if considered necessary, as part of the rectification process. However, it should be strictly ensured that the additional financing is not provided with a view to ever-greening the account.

In another circular issued on Wednesday, RBI said banks can extend finance to ‘specialised’ entities established for acquisition of troubled companies subject to the general guidelines applicable to advances against shares/debentures/bonds as contained in the above-mentioned master circular and other regulatory and statutory exposure limits.

The lenders should, however, assess the risks associated with such financing and ensure that these entities are adequately capitalised, and the debt-equity ratio for such an entity is not more than 3:1.



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