Stricter RBI norms for corporate loan rejigs | india | Hindustan Times
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Stricter RBI norms for corporate loan rejigs

india Updated: Feb 02, 2013 02:02 IST
HT Correpondent

In a move to check a surge in bad loans the Reserve Bank of India (RBI) has tightened norms for restructuring of loans by banks and financial institutions. RBI has hiked provisioning requirements to 5% from the existing 2.75%.

Increase in provisioning will dent profitability of banks as they will have to put more money aside to cushion for loans that stop yielding interest.

For example, if a bank agrees to restructure Rs.100 loan of a company then the lender will have to keep aside Rs.5 as provision from profits instead of Rs.2.75 at present.

"It has now been decided to increase the provision to 5% in respect of new restructured standard accounts (flow) with effect from April 1, 2013 and in a phased manner for the stock of restructured standard accounts as on March 31, 2013," said RBI in draft guidelines released on Thursday.

For accounts restructured prior to March 31, 2013, banks would have to make provision of 3.75% in the first phase effective March 31, 2014.

The increase of 1% additional provisioning in case of restructured accounts before March 31, 2013 will be spread over four quarters of 2013-14.

In the next phase it will be 5% with effect from March 31, 2015. The additional provision would be spread over the four quarters of 2014-15.

RBI also said that with effect from April 1, 2015, restructured accounts would be classified as sub-standard.

"The RBI wants parties involved in restructuring to act responsibly," said SL Bansal, MD, Oriental Bank of Commerce.

"The promoter should evaluate all options before applying for restructuring and the banks should follow the mandated guidelines before agreeing to the restructuring of the asset. Of course, the profitability at banks will take a hit in the near and long-term," he said. Promoters' seeking restructuring will have to give personal guarantee under new norms.

"It has been decided that promoters' personal guarantee should be obtained in all cases of restructuring and corporate guarantee cannot be accepted as substitute for personal guarantee," it said.