Bad loans to soar new RBI loans

By Accommodation Times News Service

The RBI said from April 2015 banks will no longer have the leeway to relax repayment norms for troubled companies without classifying their loans as non-performing assets, which would lead to a surge in bad loans. RBI has also asked banks to increase provisions on loans restructured from June 2013 to 5% from the present requirement of 2.75%.

Also the promoters are risking if they default in restricted loans as RBI has made it mandatory for banks to obtain a personal guarantee on all restructuring cases in future. Until now RBI restructuring norms will allowed banks to avoid applying the bad loan tag on distressed accounts which were given additional time to tide over the difficulties. However the central bank has made exceptions for projects delays in infrastructure and commercial real estate.

“The working group (WG) recommended that the RBI may do away with the regulatory forbearance regarding asset classification on restructuring of loans and advances in line with the practice followed in several jurisdictions. However, in view of the current domestic macroeconomic situation as also global situation, this measure could be considered say, after a period of two years,” RBI said.

Stating that it has accepted the recommendation, RBI said “Accordingly, the extant asset classification benefits available on restructuring on fulfilling certain conditions will be withdrawn for all restructurings effective from April 1, 2015,” RBI said in a circular issued to all banks. This implies that a standard account on restructuring would be immediately classified as substandard.

To prepare for this eventuality, RBI has increased provision from 2.75% to 5% in respect of new restructured standard accounts with effect from June 1, 2013. Also provisions on the existing stock of restructured loans will be increased gradually from 2.75% to 5% by 2015.

Although tightening of restructuring norms increases the size of reported bad loans, rating agencies have generally been bullish on the proposals which were first made in February, calling them credit positive.

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