Banks want RBI to relax debt recast guidelines

Restructuring in limbo as promoters refuse to provide personal guarantees

With the deadline of the financial year-end approaching for recognition of bad loans, banks have written to the Reserve Bank of India (RBI) seeking relaxation of debt recast norms, including spreading provisioning of large accounts for eight quarters and not seeking personal guarantees from existing promoters.

Banks want RBI to relax the clause on promoters’ guarantee and make it applicable only when there is a management change or a new promoter is taking over the debt-ridden company, according to a letter sent by the Indian Banks’ Association to the central bank last month.

Many promoters have refused to give their personal guarantee on loan restructuring, blaming the change in policies or cancellations of mines/spectrum by courts, which led to their companies becoming non-performing assets (NPAs).

On provisioning, the existing guidelines say that upon restructuring, the entire provisioning is required to be recognised upfront by the banks. On this, banks say as large borrowers’ accounts involve large provisioning requirements, a time period of eight quarters should be given to spread the provisioning.  

Elaborating the rationale for the leeway in restructuring, the chairman of a medium-sized public sector bank (PSB) said the resolution in most big-ticket troubled loans (Rs 500 crore and above) has been slow. Banks have to set aside a significant amount (for stressed or NPAs), at a time when interest income has been flat or showing marginal rise, putting tremendous pressure on their books. So, spreading of provision burden over longer period will reduce the burden on banks’ financials.

Banks, which have turned cautious after the Vijay Mallya episode that led to the arrest of top IDBI Bank officials, are also seeking for all debt recast cases to be cleared by the Overseeing Committee (OC), which was set up to clear only strategic debt restructuring cases. The tough debt recast norms, along with banks insisting on the OC clearance for all cases, have resulted in a stalemate.

Banks also asked for removal of the ceiling of 10 per cent of the restructured debt into equity or related instruments in both listed and unlisted companies. They also asked for buyback by existing promoters at pre-agreed milestone-based pricing. Banks also want relaxation in takeover rules, so that they do not have to make an open offer, in case lenders take more than 51 per cent stake in the company.

Companies are also asking banks to consider private equity funding, if any, to be considered as promoters’ contribution.

After the loan restructuring, lenders also want the right to appoint a non-executive chairman of the board and equal representation on the board in the ratio of 33 per cent directors each by lenders, promoters and independent directors. Lenders have sought the right to appoint top officials of companies, including, but not limited to, heads of finance, commercial and operations.

Banks say till these changes are not made, it would not be possible for them to restructure the accounts, which would lead to many companies becoming NPAs in the March quarter. RBI is yet to respond to these recommendations.

With most companies not taking up any new project, the investments by Corporate India have slowed down considerably. Due to this, the corporate loan growth remained extremely weak, declining 5.1 per cent year-on-year in January 2017. The decline in infrastructure loans was higher at 8.7 per cent, while retail loans reported a robust growth of 12.9 per cent in the same period, and are sustaining banks’ profits.

Aversion to take decisions by PSBs, pending resolutions of large stressed corporate accounts, lack of new capacity addition or expansion plans, and pending issues in power, telecom etc, are all contributing to sustained slowdown in industrial credit. Such slowdown is expected to continue in FY18, say analysts.