Banking Draft guidelines on restructured advances :: Centrum

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Banking

Draft guidelines on restructured advances

RBI released draft guidelines on ‘Review of Prudential Guidelines on Restructuring of Advances’. Broadly, the guidelines incorporate suggestions made by the working group (Chairperson: Shri B. Mahapatra) including gradual hike in provisioning requirements to 5% and withdrawal of regulatory forbearance allowing classification of restructured advances as standard among many others.  Over the long term, the draft guidelines should reduce arbitrage for banks to restructure loans and thus make restructuring more objective. In the immediate term, provisioning cost on standard restructured loans will go up impacting is PBT for public banks by 6-7% though eventual impact will be limited due to potential upgrades (refer our case studies on PNB & SBI).

Key guidelines:
m  Stiffer Provisioning: Banks would need to step up provisioning on restructured loans by 100bps from FY14 to 3.75% and to 5% by FY15 on the existing stock of restructured loans. All new incremental restructured loans would attract a charge of 5% from April 1, 2013. Further, from April 2015, the regulatory forbearance shall be withdrawn implying that restructured loans will fall into the sub standard category. The guidelines will impact PSBs materially due to their significant stock of restructured assets (7-11% of loans) with impact likely to be minimum for SBI among PSBs. Private banks are better placed due to smaller restructured assets base (1-3% of loans).
m  Upgrades in restructured category allowed: RBI has also accepted proposals of the working group to permit upgrading of loans from restructured category on satisfactory performance. Banks can upgrade a restructured loan to a “standard loan” category if the loans have been performing for a specified period (12 months for the credit facility with longest moratorium). Moreover, the proposal to permit postponement of the commissioning date for infrastructure projects has also been retained. Collectively, acceptance of these proposals are positive and would help in mitigating the impact arising from stiffer provisioning requirements as for some banks nearly 30-40% of reported restructured loans could be upgraded. 
m  Promoter contribution defined: The revised guidelines also seek to enhance promoters’ contribution and his/her personal guarantee to ensure restructuring is done for only viable cases. According to the guidelines, promoters have to bring higher of 1) 15% of the sacrifice accepted by the bank or 2) 2% of the restructured debt.
m  Cap on debt to equity conversion: The proposal to restrict conversion of debt into preference shares at 10% of restructured debt has been accepted. Importantly, conversion of debt into equity should be done only in the case of listed companies.
m  Impact analysis: The draft guidelines on restructured assets has two implications: 1) negative impact arising from incremental provisioning on existing and new restructuring and 2) positive fallout on account of release of provisions as certain restructured exposures get upgraded to standard category. As evident in the exhibit below, the guidelines are more consequential for PSBs owing to higher restructured assets relative to private players. From the earnings perspective, the eventual impact would be function of timings of upgrades (refer case studies on SBI & PNB in following pages). From a long term perspective, the draft guidelines represent a significant and prudential move to ensure complete recognition of asset stress and should force banks to use restructuring for the purpose it is designed for.

Thanks & Regards, 

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