Personal guarantee must before debt restructuring

A Reserve Bank of India (RBI) panel has recommended that banks seek personal guarantee from promoters and adopt a ‘carrot-and-stick policy’ while restructuring loans of corporates.

“As stipulating personal guarantee will ensure promoters’ skin in the game or commitment to the restructuring package, obtaining the personal guarantee of promoters be made a mandatory requirement in all cases of restructuring,” the panel said in its report, on which it has invited comments of stakeholders by August 21.

The RBI had, in January, set up the panel to review the existing  guidelines on restructuring of advances by banks and financial institutions. The panel, which is headed by RBI Executive Director B Mahapatra, said corporate guarantee should not be considered as a substitute for the promoters’ personal guarantee.

In cases where the restructuring package could not be implemented due to promoters’ non-adherence to terms and conditions, the banks should exercise exit option at the earliest with a view to minimise the losses, the report said.

The panel further said that conversion of debt into preference shares should be done only as a last resort and it  should be restricted to a cap (say 10 per cent of the restructured debt) and only in the case of listed companies.

The banks, according to the report, should disclose all recast loans on books, and from hereon keep a 5 per cent provision for new standard loans recast, as against the existing norm of 2 per cent. These provisions could be implemented over a period of two years.

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