The Reserve Bank of India (RBI) has issued draft guidelines on “Review of Prudential Guidelines on Restructuring of Advances by Banks and Financial Institutions” that follows from the recommendations of the working group on the subject under the chairmanship of Mr. B. Mahapatra.
The draft guidelines contain several technical details regarding prudential norms on income recognition, asset classification and provisioning as well as on substantive and procedural issues pertaining to the restructuring process itself. The purpose of this post is only to discuss the tenor of RBI’s proposals rather than the intricate details.
As far as classification is concerned, the current system of regulatory forbearance will be continued until April 1, 2015, whereby “standard accounts are allowed to retain their asset classification and [non-performing asset (NPA)] accounts are allowed not to deteriorate further in asset classification on restructuring”. However, from April 1, 2015, this would change and classification benefits available on restructuring may be withdrawn. There are other specific guidelines relating to the treatment of loan accounts.
As for the restructuring process itself, the effort seems to be to streamline and tighten the process further. Only those cases where the viability of the unit (within a relatively shorter period of time) is guaranteed may be taken up for restructuring. Greater contribution is sought from promoters for restructurings so that they retain a “skin in the game” – these could be in the form of promoter’s sacrifice and additional funding as well as personal guarantees.
Overall, the guidelines seem to be more prescriptive in terms of regulating asset provisioning and corporate debt restructuring. While they place filters to ensure that only the most deserving cases will be subject to turnarounds, greater regulatory intervention (as opposed to forbearance) may reduce the incentive to companies and lenders to pursue restructuring as an option if the process becomes too cumbersome.