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RBI tightens loan restructuring norms, raises provision to 5%

Worried over rising NPA, the Reserve Bank of India on Thursday tightened rules for restructuring of most types of loans in line with global practices.

As per the latest RBI notification, provisioning on the newly restructured account has been raised to 5 per cent from 1 June  from 2 per cent now. However, for the old restructured account it will be done in the phased manner.

The Reserve Bank also said that existing 'regulatory forbearance' will no longer be available from 1 April, 2015.

' is clarified that no such incentive would be available on withdrawal of regulatory forbearance on restructuring with effect from 1 April, 2015, except in cases of restructuring by change of DCCO (date of commencement of commercial operation) of infrastructure and non-infrastructure project loans as specified in this circular,' RBI said.

As per existing guidelines, an account after restructuring is not classified as non-performing assets (NPA). However, as per the new norms, restructured account would be treated as NPA.

'This may be made applicable with immediate effect in cases of new restructuring but in a phased manner during a two year period for the existing standard restructured accounts,' it added.

As a result, the banks will have to do higher provision which will have negative impact bottom lines.
Banks are also advised that they should correctly capture the reduction in fair value of restructured accounts as it will have a bearing not only on the provisioning required to be made by them but also on the amount of sacrifice required from the promoters, it said.

Further, it said, 'there should not be any effort on the part of banks to artificially reduce the net present value of cash flows by resorting to any sort of financial engineering.'

Banks are also advised to put in place a proper mechanism of checks and balances to ensure accurate calculation of erosion in the fair value of restructured accounts, it added.
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