Should RBI allow for Restructuring of Advances?

The Loans and Advances given by banks to its borrowers are considered as Assets of the banks. Banks expect that Principal and Interest on these Advances will be repaid as per the repayment terms. However, there is always an element of risk of non repayment or default by borrowers. In anticipation of default by borrowers, banks have to keep on setting aside a certain percentage of these Advances from their profits for tolerating the losses/anticipated future losses. This practice of setting aside profits for meeting losses is called Provisioning. Provisioning is done based on expected losses as well as on specific Assets (based on occurrence of default). Indian banks make the following types of loan loss provisions at present:

-General provisions for Standard assets (Provisioning range from 0.25% to 1%),

-Specific provisions for NPAs (Provisioning range from 15% to 100%),

-Floating provisions,

-Provisions against the diminution in the fair value of a restructured asset.   

Therefore, profitability of the banks is affected on account of Provisioning when an account starts defaulting and becomes non performing. The existing regulatory set up in India provides banks to reduce this impact by way of Restructuring of the Advances. Under Restructuring, banks review the viability of a borrower/project based on revised assumptions, consider reducing interest rates, change/increase the tenor for repayment etc. in order to achieve viability of the borrower/project which leads to ensure that the borrower/project will have capacity to repay the Advance. The Reserve Bank of India (RBI) has set norms for Restructuring of Advances.  When Restructuring is done in compliance with the guidelines set by RBI, an Advance is not considered as non performing and banks are given benefits of not providing Provisioning as required for non performing Advances. This helps to banks in reducing impact of Provisioning on their current profits as well to borrowers since banks consider judiciously and TIMELY in considering their request for Restructuring of Advance. As a prudent measure, RBI norms stipulate special Provisioning of higher level for Restructured Advances as compared to general Standard assets. It was at 2% and then increased to 2.75% of the Restructured Advance. Recently, RBI has issued new guidelines related to Restructuring of Advances and Provision. As per these new guidelines, the benefit of not considering a Restructured Advance as non performing will not be available from April 01, 2015. Further, the special Provisioning of 2.75% has been increased to 5% for all the new Restructuring of Advances which may be done before April 01, 2015. For the existing Restructured Advances also the rate has been increased from 2.75% to 5% in phase manner to be achieved by FY 2015-16. From banking perspective this may be a conservative step, however, it has to be also seen from the economic view. These new rules will not encourage banks to support (by way of restructuring) borrowers as there will not be self interest attached. The borrower’s viability will not be reworked/supported by banks and situation may lead to winding up of the borrowing entities/projects. Such a scenario also increase legal disputes, affect manufacturing capacities, cause job losses, affected associated small vendors/SMEs depending on the borrowing entity etc.

Many of the borrowers where it is possible to revive them through a suitable restructuring plan may not get the opportunity of getting support from their banks.  A Borrower may have genuine need for Restructuring under certain circumstances viz. a general downturn in the economy or in any particular sector, which result in the deterioration in the financial health of borrowers. It may also be warranted in case of emergence of legal or other issues that cause delays, particularly in cases of project implementation. External developments, such as global factors may also result in widespread impact on the financial health of borrowers and may necessitate use of restructuring as a tool to help the borrower tide over difficult circumstances.

However it is also a fact that some unscrupulous borrowers with unviable companies/projects try to get the advantage of Restructuring on the slightest sign of slowing down of the economy or any particular sector of the economy leading to RBI’s concerns of excessive Restructuring of Advances and prompting it for tighter norms for Restructuring.