As­sets Re­struc­tur­ing Com­pa­nies or Property Ser­vice Di­vi­sions of Banks?

Accommodation Times - - Edtorial - By Dr San­jay Chaturvedi

When a loan be­comes bad, ac­cord­ing to RBI cir­cu­lar UBD. BPD.( PCB) MC No.3/09.14.000/2013-14 dated 1st July 2013, it has to be re­struc­tured. But un­for­tu­nately, Banks have started earn­ing in the name of struc­tur­ing of bad as­sets. As­sets Re­struc­tur­ing Com­pa­nies, a li­censed com­pany by RBI, to re­struc­ture and sell the NPA for a profit. In­stead of re­struc­tur­ing and sell­ing on dis­count to cover loan and in­ter­est, these com­pa­nies have be­come property ser­vice di­vi­sions of banks and hous­ing fi­nance com­pa­nies. Car­tel among bank man­agers and in­ten­sive branch han­dling NPA is also seen. The list is never out for pub­lic in­for­ma­tion. Ten­ders are in­vited and is­sued in non de­scrip­tive news­pa­per so that car­tel gets ad­van­tage. All bad loans trans­ferred to As­sets Re­struc­tur­ing Com­pa­nies to be sold for prof­its and re­serve price al­ways higher than fair mar­ket value.

An as­set be­comes non-per­form­ing when it ceases to gen­er­ate in­come for the bank. Ear­lier an as­set was con­sid­ered as non­per­form­ing as­set (NPA) based on the con­cept of ’Past Due’. A ‘non per­form­ing as­set’ (NPA) was de­fined as credit in re­spect of which in­ter­est and / or in­stal­ment of prin­ci­pal has re­mained ‘past due’ for a spe­cific pe­riod of time. With a view to mov­ing to­wards in­ter­na­tional best prac­tices and to en­sure greater trans­parency, ’90 days’ over­due* norms for iden­ti­fi­ca­tion of NPAs have been made ap­pli­ca­ble from the year ended March 31, 2004.

As real es­tate sec­tor is fac­ing dif­fi­cul­ties, it has been de­cided to ex­tend spe­cial reg­u­la­tory treat­ment to commercial real es­tate ex­po­sures, which are re­struc­tured up to June 30, 2009. Fur­ther, hous­ing loans granted by banks would also be el­i­gi­ble for spe­cial reg­u­la­tory treat­ment, if re­struc­tured, the cir­cu­lar said

Banks should dis­close in their pub­lished an­nual Bal­ance Sheets, un­der ‘ Notes on Ac­counts’, in­for­ma­tion re­lat­ing to num­ber and amount of ad­vances re­struc­tured and the amount of diminu­tion in the fair value of the re­struc­tured ad­vances. But un­for­tu­nately, noth­ing di­min­ishes. On the con­trary, as­sets re­serve prices are kept above mar­ket value.

The ac­counts clas­si­fied as ‘stan­dard as­sets’ should be im­me­di­ately re-clas­si­fied as ‘sub­stan­dard as­sets’ upon re­struc­tur­ing. The non per­form­ing as­sets, upon re­struc­tur­ing, would slip into fur­ther lower as­set clas­si­fi­ca­tion cat­e­gory as per ex­tant as­set clas­si­fi­ca­tion norms with ref­er­ence to the pre-re­struc­tur­ing re­pay­ment sched­ule. All re­struc­tured ac­counts which have been clas­si­fied as non- per­form­ing as­sets upon re­struc­tur­ing, would be el­i­gi­ble for up-gra­da­tion to the ‘ stan­dard’ cat­e­gory af­ter ob­ser­va­tion of ‘sat­is­fac­tory per­for­mance’ dur­ing the ‘spec­i­fied pe­riod’. In case, how­ever, sat­is­fac­tory per­for­mance af­ter the spec­i­fied pe­riod is not ev­i­denced, the as­set clas­si­fi­ca­tion of the re­struc­tured ac­count would be gov­erned as per the ap­pli­ca­ble pru­den­tial norms with ref­er­ence to the pre- re­struc­tur­ing pay­ment sched­ule. But Banks do not give enough op­por­tu­ni­ties for the bor­rower to make good the loans. The 90 days and other re­lax­ation in the cir­cu­lar never com­mu­ni­cated to the home loan bor­rower. For in­stance, a Cash Credit Fa­cil­ity or Over Draft in Cur­rent Ac­count, if re­mains just above limit sanc­tioned and ac­count gives pos­i­tive sign of re­cov­ery, Banks can­not slap NPA norms on to it.

Any additional fi­nance may be treated as ‘stan­dard as­set’, up to a pe­riod of one year af­ter the first in­ter­est / prin­ci­pal pay­ment, whichever is ear­lier, falls due un­der the ap­proved re­struc­tur­ing pack­age. How­ever, in the case of ac­counts where the pre-re­struc­tur­ing fa­cil­i­ties were clas­si­fied as ‘sub-stan­dard’ and ‘doubt­ful’, in­ter­est in­come on the additional fi­nance should be recog­nised only on cash ba­sis. If the re­struc­tured as­set does not qual­ify for up gra­da­tion at the end of the above spec­i­fied one year pe­riod, the additional fi­nance shall be placed in the same as­set clas­si­fi­ca­tion cat­e­gory as the re­struc­tured debt.

In re­spect of loan ac­counts which en­joy spe­cial reg­u­la­tory treat­ment as per para above, upon re­struc­tur­ing, such non-per­form­ing as­sets would con­tinue to have the same as­set clas­si­fi­ca­tion as prior to re­struc­tur­ing. In case sat­is­fac­tory per­for­mance of the ac­count is not ev­i­denced dur­ing the ‘spec­i­fied pe­riod’, it would slip into fur­ther lower as­set clas­si­fi­ca­tion cat­e­gories as per ex­tant as­set clas­si­fi­ca­tion norms with ref­er­ence to the pre-re­struc­tur­ing re­pay­ment sched­ule.

In case a re­struc­tured as­set, which is a stan­dard as­set on re­struc­tur­ing, is sub­jected to re­struc­tur­ing on a sub­se­quent oc­ca­sion, it should be clas­si­fied as sub­stan­dard. If the re­struc­tured as­set is a sub-stan­dard or a doubt­ful as­set and is sub­jected to re­struc­tur­ing, on a sub­se­quent oc­ca­sion, its as­set clas­si­fi­ca­tion will be reck­oned from the date when it be­came NPA on the first oc­ca­sion.

How­ever, such ad­vances re­struc­tured on sec­ond or more oc­ca­sion may be al­lowed to be up­graded to stan­dard cat­e­gory af­ter one year from the date of first pay­ment of in­ter­est or re­pay­ment of prin­ci­pal whichever falls due ear­lier in terms of the cur­rent re­struc­tur­ing pack­age sub­ject to sat­is­fac­tory per­for­mance.

The ero­sion in the fair value of the ad­vance should be com- puted as the dif­fer­ence be­tween the fair value of the loan be­fore and af­ter re­struc­tur­ing. Fair value of the loan be­fore re­struc­tur­ing will be com­puted as the present value of cash flows rep­re­sent­ing the in­ter­est at the ex­ist­ing rate charged on the ad­vance be­fore re­struc­tur­ing and the prin­ci­pal, dis­counted at a rate equal to the bank’s BPLR as on the date of re­struc­tur­ing plus the ap­pro­pri­ate term pre­mium and credit risk pre­mium for the bor­rower cat­e­gory on the date of re­struc­tur­ing”.

Fair value of the loan af­ter re­struc­tur­ing will be com­puted as the present value of cash flows rep­re­sent­ing the in­ter­est at the rate charged on the ad­vance on re­struc­tur­ing and the prin­ci­pal, dis­counted at a rate equal to the bank’s BPLR as on the date of re­struc­tur­ing plus the ap­pro­pri­ate term pre­mium and credit risk pre­mium for the bor­rower cat­e­gory on the date of re­struc­tur­ing”.

It may please be noted that the above for­mula mod­er­ates the swing in the diminu­tion of present value of loans with the in­ter­est rate cy­cle and will have to be fol­lowed con­sis­tently in fu­ture. No re­quest for chang­ing the same, par­tic­u­larly for re­ver­sion to the present for­mula, will be en­ter­tained in fu­ture.

Fur­ther, it is re­it­er­ated that the pro­vi­sions re­quired as above arise due to the ac­tion of the banks re­sult­ing in change in con­trac­tual terms of the loan upon re­struc­tur­ing which are in the na­ture of fi­nan­cial con­ces­sions. These pro­vi­sions are dis­tinct from the pro­vi­sions which are linked to the as­set clas­si­fi­ca­tion of the ac­count clas­si­fied as NPA and re­flect the im­pair­ment due to de­te­ri­o­ra­tion in the credit qual­ity of the loan. Thus, the two types of the pro­vi­sions are not sub­sti­tute for each other.

It is also re-em­pha­sised that the mod­i­fi­ca­tions ef­fected to the guide­lines on re­struc­tur­ing of ad­vances by RBI are aimed at pro­vid­ing an op­por­tu­nity to banks and bor­row­ers to pre­serve the eco­nomic value of the units and should not be looked at as a means to ever­green the ad­vances.

A re­struc­tured ac­count is one where the bank, for eco­nomic or le­gal rea­sons re­lat­ing to the bor­rower’s fi­nan­cial dif­fi­culty, grants to the bor­rower con­ces­sions that the bank would not other­wise con­sider.

Re­struc­tur­ing would nor­mally in­volve mod­i­fi­ca­tion of terms of the ad­vances / se­cu­ri­ties, which would gen­er­ally in­clude, among oth­ers, al­ter­ation of re­pay­ment pe­riod / re­payable amount / the amount of in­stal­ments / rate of in­ter­est (due to rea­sons other than com­pet­i­tive rea­sons). But in­stead of re­struc­tur­ing, it is treated as lot­tery by the com­pa­nies and never give op­por­tu­nity to poor bor­rower.

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