RBI asks banks to increase provisions in debt-for-equity swaps

Central bank asks lenders to build up over 4 quarters provisions amounting to at least 15% of the loan for SDR

The Reserve Bank of India (RBI) asked lenders to spread out, in equal instalments, provisions they make when they take over troubled loan accounts under a special restructuring programme to deal with stressed assets.

The RBI asked banks to build up over four quarters provisions amounting to at least 15% of the loan for so-called strategic debt restructuring (SDR). In that programme, banks will swap part of the loan for majority ownership of a troubled company and then look for a new owner.

Indian banks are coping with $117 billion of stressed loans. Critics say the SDR programme helped banks camouflage the scale of the problem, because they did not have to make extra provisions and they would struggle to sell the companies they were acquiring through debt-for-equity swaps

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“Banks should build provisions such that, by the end of the 18-month period from the reference date, they hold provision of at least 15 per cent of the residual loan," the RBI said in a document posted on its website.

Under other amendments to SDR announced on Thursday, the RBI also said lenders will be required to sell at least 26% of the exchanged equity in a troubled company within 18 months to keep the loan's current classification.

The revised rules will be applicable prospectively, the regulator said, but added it would be prudent for banks to follow the new rules in cases where they have already decided to undertake strategic debt restructuring.

Among other changes, the RBI said half the banks in a joint lenders' forum can agree to initiate a "corrective action plan" on a trouble borrower. Previously that needed approval of 60% of the lenders by number in a lending group.