RBI extends norms for loan valuation to FIs

The Reserve Bank of India (RBI) has extended its norms for the valuation of loans before and after restructuring to financial institutions (FIs) as well. The guidelines were issued for banks on April 9, 2009.

As per the guidelines, a fair value of the loan before restructuring will be computed as the present value of cash flows representing the existing interest rate charged on the advance and the principal, discounted at a rate equal to the bank’s BPLR as on the date of restructuring. Additionally, the appropriate term premium and credit risk premium for the borrower category will be added.

After restructuring, the fair value of the loan will be computed as the present value of cash flows representing the interest at the rate charged on the advance on restructuring and the principal, discounted at a rate equal to the bank’s BPLR as on the date of restructuring.

Again, this will also be coupled with the appropriate term premium and credit risk premium for the borrower category on the date of restructuring.