of India (RBI) has issued draft
guidelines on “Review of Prudential Guidelines on Restructuring of Advances
by Banks and Financial Institutions” that follows from the recommendations of
the working group on the subject under the chairmanship of Mr. B. Mahapatra.
guidelines contain several technical details regarding prudential norms on
income recognition, asset classification and provisioning as well as on
substantive and procedural issues pertaining to the restructuring process itself.
The purpose of this post is only to discuss the tenor of RBI’s proposals rather
than the intricate details.
classification is concerned, the current system of regulatory forbearance will
be continued until April 1, 2015, whereby “standard accounts are allowed to
retain their asset classification and [non-performing asset (NPA)] accounts are
allowed not to deteriorate further in asset classification on restructuring”.
However, from April 1, 2015, this would change and classification benefits
available on restructuring may be withdrawn. There are other specific
guidelines relating to the treatment of loan accounts.
restructuring process itself, the effort seems to be to streamline and tighten
the process further. Only those cases where the viability of the unit (within a
relatively shorter period of time) is guaranteed may be taken up for
restructuring. Greater contribution is sought from promoters for restructurings
so that they retain a “skin in the game” – these could be in the form of
promoter’s sacrifice and additional funding as well as personal guarantees.
guidelines seem to be more prescriptive in terms of regulating asset
provisioning and corporate debt restructuring. While they place filters to ensure
that only the most deserving cases will be subject to turnarounds, greater
regulatory intervention (as opposed to forbearance) may reduce the incentive to
companies and lenders to pursue restructuring as an option if the process
becomes too cumbersome.
Comments are due on the
draft guidelines by February 28, 2013.