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Overview of Restructuring of Advances – Impact of Relaxing of Norms by RBI




Tilak Gulati  *

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What is restructuring of Accounts:


Restructuring of credit account means change in the structure of the account and the basic objective is to preserve  economic value of the unit. Debt restructuring is a process that allows a borrower facing cash flow problems and financial distress, to reduce and renegotiate its delinquent debts in order to improve or restore liquidity and rehabilitate so that it can continue its operations.



RBI Guidelines for Restructuring of Advances:


In its master circular on 'Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances', RBI has exhaustively given guidelines for restructuring of advances which are applicable for industrial units -outside or within Corporate Debt  Restructuring mechanism; Small & Medium Enterprises; and all other advances.


·         Banks can restructure all accounts whether  'standard', 'sub-standard' or 'doubtful'  but not with retrospective effect.

·         Restructuring of accounts cannot be taken up unless financial viability of unit is established which is based upon certain viability benchmarks such as Return on Capital Employed, Debt Service Coverage Ratio, Internal Rate of Return, Cost of Funds and the amount of provision required in lieu of the diminution in fair value of the restructured advance. 

·         Any restructuring done without looking into cash flows of the borrower and assessing viability of the projects/activity financed by the banks would be treated as an attempt at ever greening a weak credit facility.  

·         Fraud, malfeasant and wilful  defaulter's account are also not eligible for restructuring.



What are the Major Restructuring Tenets?


Certain tenets of restructuring have been prescribed by RBI;-


1. Dues to the bank should be fully secured by tangible securities (primary + collateral) except


i)                             MSE borrowers where outstanding is up to Rs 25 lacs and


ii)                           Infrastructure Projects, provided cash flows generated from the project is adequate for repayment of loan and the financing bank has a clear and legal first claim on these cash flows.



2. Unit should be viable in 8 years in case of infrastructure activities and in 5 years in case of other units.


3. Repayment period including moratorium should not exceed 15 years in case of infrastructure and 10 years in case of other advances.


4. Promoter's contribution/ additional fund infusion should be minimum of 20% of bank's sacrifice, i.e., diminution in fair value of advance or 2% of the restructured debt whichever is higher. Such contribution/ fund infusion should invariably be brought upfront and can be brought in the form of cash, de-rating of equity, conversion of unsecured loan brought in by promoters in to equity and interest free loan.



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What Happens When Accounts are Restructured:


Upon restructuring, 'standard assets' will immediately be classified as 'sub-standard asset'; and 'sub-standard' & 'doubtful assets' will slip into further lower asset classification.  These will be upgraded only when principal and interest on all facilities in the account are serviced as per terms of repayment during the period specified under restructuring package.


Reduction in rate of interest and/or rescheduling  repayment of principal amount, as part of restructuring, will result in diminution in the fair value of the advance. Such diminution in value is an economic loss for the bank and will have impact on bank's market value of equity. Therefore, banks are required to measure such diminution in fair value of the advance and make provisions for it by debit to Profit & Loss Account.



RBI’s Restructuring Package – Pros and Cons and its Impact on Banking Industry :


All the above framework sounds so soothing and sweet as if everything is going to be overboard and transparent. During the last few years  banks and the borrowers had resorted to restructuring which was totally out of proportion. The reasons may be different.


It may be Reserve Bank of India had provided incentive on asset classification for quick implementation of the restructuring package till 31st March, 2015 (except for a few sectors such as consumer & personal loans, Capital market exposures and Commercial real estate exposure). 


It means, as per extant guidelines of RBI, upon restructuring, a 'standard' account are degraded to 'substandard'  category and an existing NPA to degrade one notch further; but, as an incentive for quick implementation, these guidelines were not  applicable till 31st March, 2015.  As such, this special incentive is not available from 01st April, 2015 onward.

Banks had taken advantage of this incentive so as not to over burden their balance sheet with non-performing assets; and the borrowers had also taken advantage of this weakness of banks. In the process, healthy units projected themselves as  weak and usurped concessions from banks whereas sick but unviable units were also able to snatch further funds from their lenders. Ultimately, it is banks that are losers. Good money has gone to undeserving hands or was thrown on bad money.



* Mr Tilak Gulati is working as Assistant General Manager, UCO Bank  He can be reached through

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