RBI/2008-09/340
DBOD.BP.No.104/21.04.132/2008-09
January
2, 2009
The Chairman and Managing Directors /
Chief Executives of all
Commercial Banks
Dear Sir,
Prudential
Guidelines on Restructuring of Advances by Banks
Please
refer to our circular RBI/2008-09/143/DBOD.BP.BC.37/21.04.132/
2008-09 dated August 27, 2008 on the captioned subject. This circular is a
comprehensive set of guidelines rationalizing and putting together the existing
guidelines. Special regulatory treatment for asset classification has been made
available to all categories of advances except consumer and personal loans, capital
market exposures and commercial real estate exposures. This treatment permits
treating standard accounts as standard after restructuring, provided certain conditions
are met. One of these conditions relates to the restructuring not being a repeated
restructuring. Another condition stipulates that the dues to the bank are fully
secured. The August 27, 2008 circular also allows restoration of standard asset
classification to the accounts which may turn into non-performing during the period
of restructuring approval process provided the restructuring package is implemented
expeditiously i.e. within 90 days from the date of receipt of application by the
bank/ taking up the restructuring process.
2. Since
the spillover effects of the global downturn have also started affecting the Indian
economy particularly from September 2008 onwards creating stress for the otherwise
viable units/ activities, certain modifications were made in the above mentioned
circular as a one time measure and for a limited period of time i.e. up to June
30, 2009 vide our circular RBI/2008 09/311.DBOD.BP.BC.93/21.04.132/2008-09 dated
December 8, 2008. Special regulatory treatment was extended to Commercial Real
Estate Exposures restructured for the first time as well as to exposures (other
than commercial real estate, capital markets and personal/ consumer loans) which
were viable but were facing temporary cash flow problems and needed a second restructuring.
3. It has been represented to RBI that
(a)
While the modifications made by the circular dated December 8, 2008 would not
be applicable to the accounts covered under the circular which turned NPAs prior
to December 8, 2008, these need to be given the special regulatory treatment as
these too have been affected by the swift effect of the global downturn on the
Indian economy since September 2008. Moreover, banks need some lead time for operationalising
the circular dated December 8, 2008.
(b) The period of
90 days allowed for restructuring is not adequate in view of the large number
of accounts potentially requiring restructuring.
(c) Drawing
power has been affected due to decline in inventory prices/ values necessitating
conversion of irregular portions into Working Capital Term Loan (WCTL) on restructuring.
However as the borrowers may be unable to provide further tangible security in
the current context, accounts even after restructuring will be classified as NPAs.
The condition of WCTL being fully secured by tangible security may, therefore,
be relaxed.
4. The above issues have been examined
by RBI. We recognize that the accounts to which special regulatory treatment has
been extended in terms of the circular dated December 8, 2008 could have faced
stress from September 2008 onwards and may not have had sufficient time to take
remedial actions/ restructuring before turning NPAs. Similarly, it is possible
that some of the accounts covered under the circular dated December 8, 2008 may
have become NPAs during the lead time required by banks to operationalise the
circular. Banks may also face operational difficulties in handling a comparatively
large volume of restructuring proposals in the stipulated time period of 90 days.
To preserve the economic and productive value of the affected assets, it is important
that swift action is taken for detection of the weaknesses and restructuring package
is put in place for viable accounts. In view of this, it has been decided that:
(a)
All accounts covered under the circular dated December 8, 2008 which were standard
accounts on September 1, 2008 would be treated as standard accounts on restructuring
provided the restructuring is taken up on or before January 31, 2009 and the restructuring
package is put in place within a period of 120 days from the date of taking up
the restructuring package.
(b) The period for implementing
the restructuring package would stand extended from 90 days to 120 days in respect
of accounts covered under the circular dated August 27, 2008 also.
(c)
The value of security is relevant to determine the likely losses which a bank
might suffer on the exposure should the default take place. This aspect assumes
greater importance in the case of restructured loans. However, owing to the current
downturn, the full security cover for the WCTL created by conversion of the irregular
portion of principal dues over the drawing power, may not be available due to
fall in the prices of security such as inventories. In view of the extraordinary
situation, this special regulatory treatment will also be available to 'standard'
and 'sub-standard accounts', covered under circulars dated August 27, 2008
and December 8, 2008 even where full security cover for WCTL is not available,
subject to the condition that provisions are made against the unsecured portion
of the WCTL, as under:
- Sub-standard Assets: 20%
during the first year and to be increased by 20% every year thereafter until the
specified period (one year after the first payment is due under the terms of restructuring).
- If the account is not eligible for upgradation
after the specified period, the unsecured portion will attract provision of 100%.
These
provisions would be in addition to the usual provisions as per the current regulation.