RBI to make debt recast norms more stringent for banks, FIs

The Reserve Bank of India (RBI) has decided to make restructuring of loans by banks and financial institutions more stringent by raising the provisioning requirement for all loans recast after April 1, 2015 to 5 per cent from 2.75 per cent and also they should be classified as non-performing assets (NPA). 

For the existing stock of restructured assets, provisioning would be raised to 5 per cent in phases over three years, RBI’s revised guidelines said on Thursday.

Currently, banks are allowed to recast debt without classifying it as NPA but they have to make higher provisions. Standard restructured advances attract a provision of 2.75 per cent, as against 0.4 per cent in standard advances.

In effect, under RBI's revised guidelines, banks will have to set aside Rs 5 for every Rs 100 restructured loan from June 1, 2013. Banking analysts aver that banks' profit before tax will be impacted by 1-3 per cent in the current fiscal as a result of fresh restructuring, where the provision is raised to five percent.

Rating agency Icra’s quick estimates suggest banks may have to earmark an additional Rs 1,500-2,500 crore as provisions in 2013-14 for their existing recast loan book. The RBI has prescribed a raise in provisioning requirement for this stock for FY2014 from 2.75 per cent to 3.5 per cent, while the total provision burden on banks till 2015 is estimated to be Rs 2,500-5,000 crore.

The move has come at a time when the debt-restructuring exercise has risen significantly over the past two years. Under the corporate debt restructuring (CDR) cell, there were 106 cases of restructured loans, of Rs 76,470 crore, in 2012-13. This was a rise from 50 cases (exposure of around Rs 39,600 crore) the previous year. 

Going by the Finance Ministry estimate, if all restructured loans are classified as NPAs with effect from Thursday, the gross NPA level of public sector banks would shoot up to 11.59 per cent of gross advances, from 4.18 per cent at the end of December.