Companies face tougher debt restructuring regime

RBI panel suggests higher bank provisioning, increase in promoter contribution in two years

In a move that will make it tougher for companies to restructure debt, a panel set up by the Reserve Bank of India has recommended higher provisioning on such loans by banks and a sharp increase in the promoters’ contribution. The panel has also recommended that personal guarantees of promoters, during loan recasts, be made mandatory to ensure continued commitment.

If the suggestions are implemented, banks will lose some incentive to recast loans, especially standard assets. The committee headed by RBI Executive Director B Mahapatra suggests that banks reclassify restructured loans as non-performing assets after two years. At present, if a standard loan is restructured, it is not necessary for the bank to degrade the asset classification provided some norms are met, though the provisioning requirement for standard asset goes up from 0.4 per cent to two per cent. However, if the loan is reclassified as an NPA, the provisioning requirement increases to 20 per cent of the outstanding amount.

The panel said banks should set aside five per cent of total assets for standard loans that are restructured, up from two per cent currently, while provisions for loans already restructured should be increased to five per cent in a phased manner over two years. It recommended that obtaining the personal guarantee of promoters must be made mandatory, even if an account was restructured due to external factors. Also, a corporate guarantee should not be considered a substitute for a personal guarantee.

WHO RECAST HOW MUCH Restructured loan book of select banks (As on March 31, 2012)                      in Rs crore
Bank	Outstanding restructured book
State Bank of India	42,744
Punjab National Bank	25,009
Central Bank of India	17,347
Union Bank of India	11,897
Bank of Baroda	8,265
ICICI Bank	4,709
Source: Bank websites

The panel advocated a higher amount of sacrifice from promoters and recommended their contribution be at least 15 per cent of the diminution in fair value or two per cent of the restructured loans, whichever was higher. The group also suggested stricter norms for banks to convert loans to equity or preferential shares. Conversion of loans into equity shares “should be done only as a last resort” and should be capped at 10 per cent of the restructured assets, it said.

Corporate debt restructuring has seen a surge of late. In the year to end-March, banks sought to restructure a record Rs 74,131 crore in corporate loans through CDR, a threefold increase from the previous year. This excludes the restructured loans of Air India and loss-making state electricity boards. A CRISIL study estimated the total restructured loan book could touch Rs 2 lakh crore by March 2013.