Corporates are
passionate about expansions, growth and success. They envisage business plan,
execute it, establish it and then look forward at new plans in pursuit of
business growth and success. The course requires funding from banks in the form
of project and non project loans. The financing plans require preparing the financial
projections, project implementation and loan repayment schedules. A common
situation faced by many finance teams is of delay in project implementation due
to circumstances sometimes in their control and sometimes not in their control.
Many a times, the business does not perform as aggressively as projected or the
business faces unprecedented situation (example INR-Dollar volatility crisis) resulting
in lower cash flows. This situation makes the corporates incapable of making
timely repayment of the principal instalments/dues. The situation requires for
relooking at financial projections, reworking the same and reschedule the loan
repayment in a form acceptable to the bank, and which Corporate can also afford
in the changed scenario.
It has been observed
that while availing the loan, the borrower generally projects optimistic
financial projections and does not factor many important aspects like hedging
cost, taxes, duties, discounts, commissions etc. The Sales projections are made
aggressively however the Cost of Sales is not prepared with a conservative view
(i.e. keeping the cost high). This leads to financial projection picture giving
acceptable financial ratios to the lenders. The appraisal teams at lenders
understand this phenomena and rework on projections submitted by the borrower, realign
with the industry standards and undertake sensitivity analysis.
The reschedulement of
loan generally requires to increase the remaining tenor of the loan with or
without additional moratorium. The lenders have to consider this aspect from
three points: (1) Capability of the borrower’s projected cash flows to repay as
per the revised financial projections (2) Sacrifice of bank based on difference
in present value of loan cash flows (Principal and Interest) pre and post
reschedulement (3) Regulatory/RBI guidelines
Capability of
the borrower’s projected cash flows to repay as per the revised financial
projections
This is the most
crucial aspect since understanding the capacity of the borrower’s future cash
flows that can sustain the revised repayment schedule with a sufficient
coverage (ie. Debt Service Coverage Ratio) is important otherwise the borrower
may again face the cash flow shortfall in future in repayment of loan. Since, the
process of approving a reschedulement being time consuming for large loans, it
requires the finance teams to give their best possible sustainable projections
so that in future such need for reschedulement does not arise. Any mistake here
would cause unwanted restructuring tags in future /upset the banking
relationship.
Sacrifice of
bank based on difference in present value of loan cash flows (Principal and
Interest) pre and post reschedulement
The extension in
remaining loan’s tenor affects the present value of the loan. Therefore, if the
rate of interest on the loan is kept at the same level of pre-reschedulement,
the present value of the loan will decline, and cause sacrifice to the bank.
From regulatory aspects, if such reschedulement falls under restructuring, then
banks have to also provide for provisioning (i.e. reducing their business profits)
to the extent of sacrifice.
Regulatory/RBI
guidelines
The Reserve Bank of
India (RBI) guidelines consider the term loans from Infrastructure project loans
and Non infrastructure project loans. These guidelines consider the Date of
Commencement of Commercial Operations (DCCO) as critical aspect for success of
project loans. The guidelines provide that for infrastructure project loans,
the DCCO can be extended upto two years from the original DCCO date
as considered at the time of sanction of loan. Such extension in DCCO and consequential
shift in repayment period by equal or shorter duration (including the
start date and end date of revised repayment schedule) would also not
be considered as restructuring provided all other terms and conditions of the
loan remain unchanged. For non infrastructure project loans, the DCCO and
consequential shift in repayment is permitted to be extended upto one
year without classifying the loan as restructured.
The DCCO can be further
extended by two years (i.e total four years from original DCCO) for Infra
project loan and one year (i.e total two years from original DCCO) for non
infra project loans from the original DCCO, classifying the loans as
restructured loans. However, any change in the repayment schedule
of a project loan caused due to an increase in the project outlay (increase by
25% or more of the original outlay) on account of increase in scope and size of
the project, is not treated as restructuring. The classification of loan as
restructured has bearing (reducing their profits) on the profitability of
the bank due to sacrifice involved and also higher stipulated provisioning
norms by RBI for such loans. Therefore, the banks have to really have a
heart when the loan has to be acknowledged for restructuring.
It may be observed that
if the shift in DCCO is within the permitted two year (for Infra Project Loans)
and one year (for Non Infra Project Loans) limits from the original DCCO, the RBI
guidelines allows consequential shift in repayment period by equal or shorter
duration (including the start date and end date of revised repayment
schedule) without classifying the loan as restructuring provided all
other terms and conditions of the loan remain unchanged.
The issue faced by
corporates is in situation when the DCCO is achieved within the permitted two
years or one year limit (with consequential permitted change in repayment
schedule) and after that during the renewed life of the loan at a later stage
due to other extraneous reasons the borrower needs to again either extend the
repayment schedule or to change the loan instalment amount without changing the
terminal date of repayment. It is clear that since during the first instance
(extension in DCCO and Repayment Schedule by two or one year) the account was
not classified as restructured, therefore now at the time second instance for
need of change in repayment schedule, will make the account as
restructured and attract the higher provisioning norms and other
bearings for the banks and borrower.
In light of the above
issues, while working out the project plans and implementation schedule, deciding
the DCCO has a lot of weight on financing plans. The DCCO has to be decided
very cautiously since extension in DCCO is very clearly permitted to be maximum
two (without Restructuring tag) to four (with Restructuring tag) years for
infra project loans, and one (without Restructuring tag) to two (with
Restructuring tag) years for non infra project loans.
It would be important to note that as per the
February 2014 RBI Guidelines, if banks take over/refinance the existing infra
and other project loans by way of take-out financing, they can fix a
longer repayment schedule provided the loan is ‘Standard’ asset in the
books of existing bank, should have not been restructured in the past,
substantial take over (i.e. more than 50%) and repayment schedule is fixed
taking into account life cycle of the project and cash flows from the
project.
Related Article : Should
RBI allow for Restructuring of Advances?
