Another headache for banks: Bad loans to surge as RBI tightens recast norms

The Reserve Bank of India has tightened asset restructuring rules for banks and said that all loans recast after April 1, 2015, should be classified as non-performing asset (NPA). The new rules also include raising capital requirements and forcing banks to seek personal guarantees from controlling shareholders of companies whose loan terms are eased.

Indian banks have increasingly sought to restructure troubled corporate loans instead of declaring them to be non-performing.

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Under the new rules, from June 1 banks must set aside provisioning for 5 percent of the value of a loan that is newly restructured, from 2 percent previously.

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The Reserve Bank of India will not force banks to reclassify loans as non-performing in the event of project delays in the infrastructure and commercial real estate sectors, it said.

To discourage banks from liberally restructuring loans, RBI has said that from April 2015 an account will have to be classified as sub-standard as soon as it is restructured. A standard asset on restructuring would be immediately classified as sub-standard as also non-performing assets. Any recast will push the loan account into further lower category unlike the existing norms wherein standard loans are allowed to retain their status on restructuring. Non-performing accounts too are currently allowed not to deteriorate further in asset classification, which are generally of four types: standard, sub-standard, doubtful and bad assets.

“All restructured accounts which have been classified as non-performing assets upon restructuring, would be eligible for upgradation to the standard category after observation of ‘satisfactory performance’ during the ‘specified period’,” RBI added.

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The central bank said that requiring personal as opposed to corporate guarantees “will ensure promoters’ ‘skin in the game’ or commitment to the restructuring package.” In other words, promoters risk losing their shirt if they default on restructured loans as RBI has made it mandatory for banks to obtain a personal guarantee on all restructuring cases in future.

Indian lenders sought to restructure a record $16.6 billion in loans in the year that ended in March, an increase of 38 percent year-on-year. Classifying a loan as a bad loan forces the bank to set aside a large portion out of its earnings to make up for loss arising out of a potential default.

The new rules are bound to make banks more cautious as they will have to icnrease provisioning for sticky assets and force promoters to share the burden of restructured loans.

According to Icra, banks might have to keep an additional Rs 1,500-2,500 crore as provisions in 2013-14 for their existing recast loan book.

With inputs from Reuters