Bad loan rejig: RBI says first loss must be borne by promoters

In a major respite to banks who are facing NPA problems, the Reserve Bank today said restructuring of a bad loan should be done in such a manner that shareholders, including promoters, bear the first loss and not the lenders.
"The general principle of restructuring should be that the shareholders bear the first loss rather than the debt holders," the RBI said in the 'Framework for Revitalising Distressed Assets', released this evening.
In the new guidelines, which will be effective from April 1, the RBI has asked lenders to form a committee called 'joint lenders' forum (JLF) to formulate a plan for early resolution of the stress in the account.

JLF or corporate debt restructuring (CDR) cell, while restructuring an account, should consider the possibility of transferring equity of the company by promoters to lenders to compensate for their sacrifices.
The committee should also consider an option to transfer the promoters' holdings to a security trustee or an escrow arrangement till turnaround of company. "This will enable a change in management control, should lenders favour it," the RBI said.
The central bank said if a borrower has undertaken diversification or expansion of activities which has resulted in the stress on the core business of the group then the lenders should stipulate a clause for sale of non-core assets as a condition for restructuring the account.

For restructuring of loans of listed companies, lenders may be compensated for their losses by issuance of equities of the company upfront, subject to regulatory requirements.
According to RBI, the amount of recast loans touched an all-time high of Rs 4 trillion or 10.2 per cent of the overall advances as of September 2013.
It had warned in December that in case the restructured assets were added, the total stressed advances ratio rose to 10.2 per cent in September 2013 from the 9.2 per cent in March 2013.