India Financial Services Goodbye Restructuring : Morgan Stanley

RBI released final guidelines on loan restructuring after
considering the comments received to draft guidelines
issued in January 2013. The final guidelines, will make
restructuring redundant from April 2015 onwards
(except infrastructure). At the same time, the RBI has
been more lenient on projects involving changes in date
of completion (both infrastructure and other project
loans).
The salient features of the final guidelines are:
1) No regulatory forbearance on restructuring of
advances (except incase of non-operational
projects): Until now, on restructuring, a standard loan
retained its asset classification and NPAs were allowed
not to deteriorate further in asset classification. The RBI
has now moved to the international practice of
classifying a restructured asset as an impairment, with
effect from April 1, 2015. It is unclear whether old
restructured loans will become NPLs on that day – but
our reading is that they will. This implies that in two years,
SOE banks will potentially see big increases in NPL
stock and consequently provisioning charges.
Regulatory forbearance would continue, on
restructuring of all non-operational projects: The
RBI has allowed date of completion to be shifted by two
years for infrastructure projects and one year for non
infrastructure projects. A mere change in date of
completion (as long as other terms remain constant) will
not be construed as restructuring. This forbearance has
been extended to CRE projects also – where delay is
caused by extraneous reasons – date of completion in
these projects can be shifted by one year.
In our view, this would take up provisioning
meaningfully from F16 onwards – hence expectations of
credit charges at SOE banks declining in two years time
will go away. This also highlights the significant stress
faced by projects under implementation – where banks
are accruing interest income. RBI has pushed these
problems into the future but underlying earnings at
banks with large exposure to these projects is weak.
This justifies the premium multiples at retail lenders

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2) General provisioning on restructured standard
advances: The final guidelines have increased the general
provisioning to 5% on new restructurings with effect from
June 1, 2013. In the case of existing stock of restructured
advances, the provisioning will be raised in a phased
manner from the current 2.75% to 3.50% w.e.f. March 31,
2014, 4.25% w.e.f. March 31, 2015 and 5% w.e.f March 31,
2016. This compares to 5% provisioning by March 31, 2015
proposed in the draft guidelines.
3) Provision for diminution in fair value – The working
group had recommended that current norms are
appropriate and correctly capture the erosion in fair value.
RBI, as proposed in its draft guidelines has made it more
punitive (likely marginally). It has asked banks to
incorporate a higher risk premium (than for
non-restructured loans) to find the present value of the
principal component of a loan. Further, the amount of
principal converted in debt/equity instruments would need
to be held under AFS and valued as per usual norms.
This can potentially take up provisions meaningfully on new
restructurings.
4)Promoters’ Sacrifice: The final guidelines have decided
promoters’ contribution should be a minimum of 20% of
banks’ sacrifice or 2% of the restructured debt, whichever is
higher. This is higher than that proposed by the draft
guidelines (15% of banks sacrifice or 2% of restructured
debt, whichever is higher).
5) Personal Guarantee of Promoters: In line with the WG
recommendation, the final guidelines have made personal
guarantee by promoters a mandatory requirement in all
cases of restructuring.
6) Criteria for up-gradation of account classified as
NPA on restructuring: As recommended by the WG, in the
case of multiple credit facilities, the guidelines require a
requirement of satisfactory performance of one year from
the first payment of interest/principal which ever is later, on
the credit facility with the longest period of moratorium.
7) Conversion of debt in to equity: The final guidelines
have accepted the draft proposal to restrict the conversion
of debt in to equity/preference shares to 10% of the
restructured debt. Further, conversion into equity should be
done only in the case of listed companies.
8) Viability time period: The WG felt that the current time
span of seven years for non-infrastructure borrowers’ accounts
and ten years for infrastructure accounts for becoming viable
on restructuring was too long. As a result, RBI has lowered the
viability time period to eight years in the case of infra projects
and five years in other cases.