Promoters of financially troubled companies may now have to put the money where their mouth is, if they want their loans restructured.
After a series of loan recast exercises, in which banks have taken a hit (like in the cases of GTL Infra and Kingfisher Airlines), lenders are tightening the clamps on borrowers to protect their interests.
In a meeting attended by bankers and representatives of the corporate debt restructuring (CDR) cell, bankers have proposed to change the rules to ensure promoters bring in more funds than they do now. According to bankers who attended the meeting, a company may have to chip in with 25 per cent of the haircut taken by the bank while restructuring of loan.
At present, promoters contribute up to 10-15 per cent of the haircut taken by the bank. Banks have to make a provision, that is, allocate higher capital to the extent of the diminution of the loan’s net present value arising out of extending the loan tenure or lowering the interest rate.
In case of a debt recast, the standard asset provisioning requirement for banks also goes up five times to two per cent.
Lenders met on Monday to review guidelines on the existing debt restructuring mechanism. Last week, in a written communication to the CDR cell, the finance ministry had asked bankers to take a relook at debt restructuring norms, believed to be lenient towards promoters.
“At present, promoters are expected to chip in with 15 per cent of the hit that lenders take in a recast. There was a suggestion from some lenders to raise this to 20-25 per cent to ensure commitment,” said a senior official at State Bank of India (SBI).
CDR has been designed to facilitate lenders and borrowers negotiate new loan terms to avoid defaults. The process generally involves extending the loan repayment tenure and a reduction in interest rate, among others, which is generally a loss of income to the bank. Promoters are asked to share this burden with banks by way of additional equity or personal guarantees and others.
The lenders also insisted on the personal guarantee clause to be made mandatory, irrespective of the reason behind the drop in performance of the company.
Till now, bankers have waived the personal guarantee clause in cases where it was clearly established that the financial problem was due to external factors. Also, companies should disclose the haircut taken by lenders in a debt recast and exit from CDR when the financials are back on track.
“Personal guarantee will make the promoters more accountable whenever they approach lenders for a debt recast. There were also many other issues discussed, like mandatory disclosure in the balance sheet. For instance, recommence should be calculated every year and be disclosed as a part of the contingency liability in the annual report of the company,” said another banker after the meeting.
“In the fourth quarter (ended March 2012), there was a spate of references for debt recast. This gave rise to a feeling that some companies came in even if they did not deserve a reworking of the debt repayment schedule and other support,” an SBI official added.