By Dr. Sanjay Chaturvedi
When a loan becomes bad, according to RBI circular UBD.BPD.(PCB) MC No.3/09.14.000/2013-14 dated 1st July 2013, it has to be restructured. But unfortunately, Banks have started earning in the name of structuring of bad assets. Assets Restructuring Companies, a licensed company by RBI, to restructure and sell the NPA for a profit. Instead of restructuring and selling on discount to cover loan and interest, these companies have become property service divisions of banks and housing finance companies. Cartel among bank managers and intensive branch handling NPA is also seen. The list is never out for public information. Tenders are invited and issued in non descriptive newspaper so that cartel gets advantage. All bad loans transferred to Assets Restructuring Companies to be sold for profits and reserve price always higher than fair market value.
An asset becomes non-performing when it ceases to generate income for the bank. Earlier an asset was considered as non-performing asset (NPA) based on the concept of ‘Past Due’. A ‘non performing asset’ (NPA) was defined as credit in respect of which interest and / or instalment of principal has remained ‘past due’ for a specific period of time. With a view to moving towards international best practices and to ensure greater transparency, ’90 days’ overdue* norms for identification of NPAs have been made applicable from the year ended March 31, 2004.
As real estate sector is facing difficulties, it has been decided to extend special regulatory treatment to commercial real estate exposures, which are restructured up to June 30, 2009. Further, housing loans granted by banks would also be eligible for special regulatory treatment, if restructured, the circular said
Banks should disclose in their published annual Balance Sheets, under ‘Notes on Accounts’, information relating to number and amount of advances restructured and the amount of diminution in the fair value of the restructured advances. But unfortunately, nothing diminishes. On the contrary, assets reserve prices are kept above market value.
The accounts classified as ‘standard assets’ should be immediately re-classified as ‘sub-standard assets’ upon restructuring. The non performing assets, upon restructuring, would slip into further lower asset classification category as per extant asset classification norms with reference to the pre-restructuring repayment schedule. All restructured accounts which have been classified as non-performing assets upon restructuring, would be eligible for up-gradation to the ‘standard’ category after observation of ‘satisfactory performance’ during the ‘specified period’. In case, however, satisfactory performance after the specified period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule. But Banks do not give enough opportunities for the borrower to make good the loans. The 90 days and other relaxation in the circular never communicated to the home loan borrower. For instance, a Cash Credit Facility or Over Draft in Current Account, if remains just above limit sanctioned and account gives positive sign of recovery, Banks cannot slap NPA norms on to it.
Any additional finance may be treated as ‘standard asset’, up to a period of one year after the first interest / principal payment, whichever is earlier, falls due under the approved restructuring package. However, in the case of accounts where the pre-restructuring facilities were classified as ‘sub-standard’ and ‘doubtful’, interest income on the additional finance should be recognised only on cash basis. If the restructured asset does not qualify for up gradation at the end of the above specified one year period, the additional finance shall be placed in the same asset classification category as the restructured debt.
In respect of loan accounts which enjoy special regulatory treatment as per para above, upon restructuring, such non-performing assets would continue to have the same asset classification as prior to restructuring. In case satisfactory performance of the account is not evidenced during the ‘specified period’, it would slip into further lower asset classification categories as per extant asset classification norms with reference to the pre-restructuring repayment schedule.
In case a restructured asset, which is a standard asset on restructuring, is subjected to restructuring on a subsequent occasion, it should be classified as substandard. If the restructured asset is a sub-standard or a doubtful asset and is subjected to restructuring, on a subsequent occasion, its asset classification will be reckoned from the date when it became NPA on the first occasion. However, such advances restructured on second or more occasion may be allowed to be upgraded to standard category after one year from the date of first payment of interest or repayment of principal whichever falls due earlier in terms of the current restructuring package subject to satisfactory performance.
The erosion in the fair value of the advance should be computed as the difference between the fair value of the loan before and after restructuring. Fair value of the loan before restructuring will be computed as the present value of cash flows representing the interest at the existing rate charged on the advance before restructuring and the principal, discounted at a rate equal to the bank’s BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring”. Fair value of the loan after restructuring will be computed as the present value of cash flows representing the interest at the rate charged on the advance on restructuring and the principal, discounted at a rate equal to the bank’s BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring”.
It may please be noted that the above formula moderates the swing in the diminution of present value of loans with the interest rate cycle and will have to be followed consistently in future. No request for changing the same, particularly for reversion to the present formula, will be entertained in future.
Further, it is reiterated that the provisions required as above arise due to the action of the banks resulting in change in contractual terms of the loan upon restructuring which are in the nature of financial concessions. These provisions are distinct from the provisions which are linked to the asset classification of the account classified as NPA and reflect the impairment due to deterioration in the credit quality of the loan. Thus, the two types of the provisions are not substitute for each other.
It is also re-emphasised that the modifications effected to the guidelines on restructuring of advances by RBI are aimed at providing an opportunity to banks and borrowers to preserve the economic value of the units and should not be looked at as a means to evergreen the advances.
A restructured account is one where the bank, for economic or legal reasons relating to the borrower’s financial difficulty, grants to the borrower concessions that the bank would not otherwise consider. Restructuring would normally involve modification of terms of the advances / securities, which would generally include, among others, alteration of repayment period / repayable amount / the amount of instalments / rate of interest (due to reasons other than competitive reasons). But instead of restructuring, it is treated as lottery by the companies and never give opportunity to poor borrower.