Corporate loan recast norms made tougher

With the economic turnaround now on a firm wicket, the Reserve Bank of India has made restructuring of debt by companies tougher.

Promoters would now have to bring -- upfront -- at least 15 per cent of the money that bankers will lose in case of debt restructuring packages.

Removing any ambiguity on the time when promoters of companies whose units are being restructured should bring in their part of the commitment, RBI said in a communication to banks on March 30, that the additional funds required to be brought in by the promoter should be paid upfront and not phased over a period of time.

The central bank had put in place a liberal restructuring package just after the Lehman crisis in September 2008 to protect viable projects from the global financial crisis. The package had allowed second-time restructuring without lowering the status of the company or loan account.

Prabal Banerji, Hinduja group president (finance) and chief financial officer, said it was only fair for promoters to contribute at least 15 per cent of the erosion in value when banks were taking the full hair cut (loss). "It is a positive step by RBI which will help in cutting down losses of the banks from bad loans and strengthen their balance sheet," he said.

A Punjab National Bank executive said now that the economy was on a firm recovery path, banks will like to take up restructuring proposals where the promoters were serious about projects and willing to cough up funds.

This would mean that fewer proposals would come up for recast. Projects which are unviable, and where promoters are not able to bring in funds, would perhaps have to wind up or bring in a third party, he said.

The upfront infusion of funds is one of the conditions for treating the account as a standard asset (which will be making regular repayments). It is also crucial for maintaining the asset classification status of sub-standard/doubtful assets, after restructuring.

Bankers said during their annual financial inspection, RBI inspectors had raised the issue that the promoters' contribution (being a minimum of 15 per cent of lenders' hair cut) should be brought in upfront.

The earlier RBI circular on restructuring did not specify the timelines for bringing in the promoters' contribution. The confusion has been removed in the latest circular.

Restructuring can be taken up only in cases where financial viability is established and there is a reasonable certainty of repayment from the borrower. Benefits will be available only in recast cases where bank dues are fully secured and industrial units become viable in seven years. The borrowers get a maximum of 10 years, including the moratorium period, to make repayment of restructured advances.