Banks Allowed To Rescue Victims Of Slowdown
The Reserve Bank of India (RBI) has authorised banks and term lenders to reschedule all repayments by industry, based on revised production plans in view of the persistent project overruns over the past two years, top bankers said yesterday.
The decision has major ramifications for working capital and term lenders as the delays in production were threatening to turn many potentially sound accounts, hit by external causes, into non-performing assets, they said.
Financial institutions sanctioned project loans and fixed the re-payment schedule at the time of sanction. But delays made it increasingly difficult for these projects to generate returns.
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Banks hesitated to extend working capital for fear of acquiring more NPAs, making debt servicing for these projects difficult.
By permitting re-scheduling of repayments, the central bank has allowed more flexibility to these projects to service their debt, preventing some degree of delay from translating into an NPA in the lenders' books.
This would encourage working capital lending by banks, solving the liquidity squeeze afflicting these projects.
Under the present NPA norms, an asset is termed an NPA if interest payments are not made for two subsequent quarters.
The re-scheduling of repayments, however, will not impact the NPA norms, as lenders will use their discretion to decide which project will enjoy the flexibility. Besides, once the fresh payment schedule is fixed, the existing NPA norms will be applicable.
Bankers cited several causes for the time and cost overruns of projects -- the slowdown in economic activity; deteriorating exports; the 19 per-cent rupee depreciation over the year; the Asian crisis which weakened overseas investor sentiment on emerging markets; sanctions imposed by the US and Japan and natural disasters arising from the El Nino phenomenon.
The worst hit were the core sector and exports. Banks view the facility as a temporary one to help industry tide over the prevailing extenuating circumstances.
Rescheduling will be done on a case-by-case basis by each bank or consortium of lenders. A new schedule will be fixed once banks are satisfied about the date of resumption of production.