RBI’s debt restructuring panel asks for more skin in the game by promoters

Promoters seeking to restructure the debt of the company will have to bring more skin in the game and ‘sacrifice’ more than the banks, a panel set up by the Reserve Bank of India to look into the changes in the prudential guidelines on debt restructuring has recommended.

Corporate debt restructuring in India is a mechanism by which unpaid loans or bad loans after 90 days of the repayment deadlines are restructured and converted into standard assets.

The working group recommended that RBI may consider a higher amount of promoters’ sacrifice in cases of restructuring of large exposures under corporate debt restructuring or CDR mechanism as the group feels that stipulating promoter’s sacrifice at 15 per cent of the bank’s sacrifice is not sufficient and the promoters’ contribution should be at a minimum of 15 per cent of the erosion in fair value of the asset or two per cent of the restructured debt, whichever is higher.

The recommended guidelines, drawn on the lines of international practices, asks promoters to bring skin in the game or commitment to the restructuring package by mandatorily providing personal guarantee in all cases of restructuring. Until now, such guarantees were exempted when the restructuring is necessitated on account of external factors pertaining to the economy and industry. Also, corporate guarantee cannot be classified as personal guarantee.

Whenever debt is being restructured, banks usually ask for promoters to bring in a part of equity by way of issuing preferential shares. In such cases, banks get a portion of the outstanding loan as equity, which can be sold in open market after a lock in of a year. In its recommendations, the group observed that banks were adversely affected in cases of conversion of a large portion of debt into preference shares.

“Such conversions are akin to writing off the debt as in many cases these preference shares carried zero or low coupon, added with the fact that they had no market value and they did not carry voting rights like equity shares,” the report released on Friday by the banking regulator said.

Hence, the group has suggested conversion of debt into preference shares should be done only as a last resort and should be restricted to a cap (say 10 per cent of the restructured debt). Further, conversion of debt into equity should be done only in the case of listed companies.

The group has asked RBI to do away with the regulatory forbearance regarding asset classification, provisioning and capital adequacy on restructuring of loan and advances in line with the international prudential measures. The recommendations will, however, be implemented after a period of two years in view of the current domestic macroeconomic situation as the global economic scenario, the report said.

In FY 09, after the global economic turmoil hit Indian shores, the RBI had allowed a special window for restructuring of assets of companies that were facing stress due to the external factors and where the underlying business was sound. This led to a spurt in the level of restructured standard assets on account of the one-time measures allowed up to June 30, 2009. The total cumulative position of restructured standard advances increased from Rs 60,379 crore as at the end of March 2009 to Rs 1,06,859 crore as at the end of March 2011.

According to the report, the restructured standard assets at Rs 97,834 crore in March 2010 and Rs 1,06,859 crore in March 2011 were higher than the gross non-performing assets or NPAs of the banking system at Rs 81,816 crore and Rs 94,088 crore respectively during the respective period.

“There was a concern that some of these restructured standard accounts could fall back into the NPA category over a period of time if these borrowers facing temporary cash flow problems in the wake of the global financial turmoil, did not recover within a reasonable time and attain viability,” the working group noted.

Hinting on how banks use restructuring to make non-standard assets standard and do less provisioning, the group has asked banks to recognise the inherent risks in assets classified as standard on restructuring and the provision requirement on such accounts should be increased from the present 2 per cent to 5 per cent with immediate effect.

(Edited by Prem Udayabhanu)


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