RBI against extension of debt recast deadline

RBI against extension of debt recast deadline
Business Standard, August 11, 2009, Section II, Page 3

Anindita Dey / Mumbai

CDR cell, banks had sought extension of Aug 30 deadline for restructuring assets.

The Reserve Bank of India (RBI) is of the view that there is no case for an extension of deadline for restructuring of loans beyond August 30.

In various meetings with banks, RBI has made it clear that it does not think that has been or will be a sharp rise in cases where companies across sectors are prone to fall sick or are becoming financially weak, threatening the financials of banks.

“Rather, RBI feels the economy has started showing signs of improvement and we have given an upward bias in our growth forecast going forward,” said a source close to development.

Not only banks, the corporate debt restructuring (CDR) cell had also made representations to RBI for extension of the deadline for restructuring of assets which ends on August 30 this year.

RBI is of the view that exceptional regulatory treatment of retaining the asset quality even with second restructuring was an one-time special dispensation in response to the stressful economic conditions and the global slowdown.

“Now various sectors have started improving and corporate earnings are good. Even RBI is planning to unwind the stimulus at a suitable time. The primary problem of fund availability is easing, the source said.

If an asset is becoming sick and has systemic implications, banks can always make case-to case representations.

As an example, sources said, banks are discussing with RBI for a special manadate of not treating the Dabhol project as an NPA. This is a Rs 8,000-crore account with banks and declaring it NPA will have a lot of systemic implications.

Secondly, there is no reason why a company should wait so long since December 2008 to approach banks for restructuring of its accounts if it was really facing financial strain. RBI fears that the company may use such special dispensation just to delay paying bank dues even when they have funds.

While there may be genuine cases needing restructuring, special discretion may be used to windowdress the balancesheet. In any case, normal restructuring option is always open to banks when it feels an asset is prone to be an NPA.

Normal restructuring is upgrading an asset after one year of holding it as an NPA by the banks if it is convinced of the company’s new business plan.

Under the guidelines issued in December 2008, RBI had stated, “In the face of the current economic downturn, there are likely to be more instances of even viable units facing temporary cash flow problems.

To address this problem, it has been decided, as a one-time measure, that the second restructuring done by banks of exposures (other than exposures to commercial real estate, capital markets and personal/consumer loans) up to June 30, 2009, will also be eligible for exceptional regulatory treatment”..

Exceptional regulatory treatment means retaining the asset classification of the restructured standard accounts in the standard category.

Normally, when the company or an account fails to service its debt payments to its bank beyond 90 days from the due date, the asset is classified as a substandard asset, then doubtful and then loss on the books of the banks and additional capital provisioning is made with each downgrading. In all three cases — substandard, doubtful and loss — the asset is considered to be a non-performing asset.

In the due course, if the bank is convinced of the feasibility of the business plan presented by the company that it will be able to service its dues, the banks can upgrade the asset but only after retaining the asset in the NPA category for one year from the date of downgrading the asset.

After earmarking an asset as NPA, the capital provisioning requirement towards such cases becomes much more than towards standard asset. Any further advances could only be given after restructuring or board approval.

In its directions, RBI had made a special dispension to allow banks to restructure the asset for a second time so as to recover its dues and even as doing so, the account will be treated as a standard asset and not an NPA which otherwise would have been classified as a NPA.