Concerned over rising bad debts in the banking system, the Reserve Bank of India (RBI) on Thursday sharply raised the provisioning requirements for restructured loans of banks to 5 per cent from existing 2.75 per cent.
The announcement comes less than three months after the apex bank raised provisioning on restructured accounts to 2.75 per cent to 2 per cent to mitigate risk attached with such loans.
"It has now been decided to increase the provision to five per cent in respect of new restructured standard accounts (flow) with effect from April 1, 2013 and in a phased manner for the stock of restructured standard accounts as on March 31, 2013," RBI said in a notification.
For accounts restructured prior to March 31, 2013, banks would have to make provision of 3.75 per cent in the first phase effective March 31, 2014.
The increase of one per cent additional provisioning in case of restructured accounts prior to March 31, 2013 will be spread over the four quarters of 2013-14, it said.
In the next phase it will be 5 per cent with effect from March 31, 2015. The additional provision would be spread over the four quarters of 2014-15, it added.
"It has been decided that promoters' personal guarantee should be obtained in all cases of restructuring and corporate guarantee cannot be accepted as a substitute for personal guarantee," it said.
However, corporate guarantee can be accepted in those cases where the promoters of a company are not individuals but other corporate bodies or where the individual promoters cannot be clearly identified, it added.
The notification further said: "It has been decided that promoters' sacrifice and additional funds brought by them should be a minimum of 15 per cent of banks' sacrifice, or 2 per cent, of the restructured debt, whichever is higher."
This stipulation is the minimum and banks may decide on a higher sacrifice by promoters depending on the riskiness of the project and promoters' ability to bring in higher sacrifice amount, it said.
Further, it said, such higher sacrifice may invariably be insisted upon in larger accounts, especially CDR (corporate debt restructuring) accounts.
The decisions are based on recommendations made by Working Group headed by B Mahapatra to review the existing prudential guidelines on restructuring of advances.
The group recommended that the RBI may 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.
"However, in view of the current domestic macroeconomic situation as also global situation, this measure could be considered say, after a period of two years," it had said.
RBI has decided to accept the above recommendation and give effect to this with effect from April 1, 2015, it added.
"Accordingly, the extant asset classification benefits available on restructuring on fulfilling certain conditions will be withdrawn from that date," it said.
"It implies that a standard account on restructuring would be immediately classified as sub-standard on restructuring as also the non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per the extant asset classification norms with reference to the pre-restructuring repayment schedule," it said.