“This may help more banks as well as borrowers to take up one-time restructuring of loans… It will be all the more relevant once the Supreme Court lifts the stay on classification of loan assets,” a senior banker told ET.
According to the regulations, the loan resolution process announced by RBI to address Covid-related stress is invoked when lenders representing 75% by value and 60% by number agree to restructure a loan. Unlike normal restructuring under earlier regulation, a loan to a Covid-hit borrower continues to be standard even with restructuring. Such restructured loan would attract a provisioning of 10%, which is lower than 15% and 25% provisioning for secured and unsecured loans that turn NPA.
However, if a loan slips into NPA —or, becomes 90-day overdue — after the invocation date, the account is categorised as NPA and lending banks are required to make higher provisioning.
On implementation of the one-time loan restructuring — which has to be completed within 180 days from the date of invocation — the account can be upgraded to ‘standard’ (from NPA). Nonetheless, the rule requires banks to continue with the higher provisioning which kicked in when the account slipped into NPA category.
“Banks want a status quo on the asset classification. This means not categorising an account as NPA in the intervening period (from invocation date to implementation date) even if there is a slippage, and making a provision of 10% upon implementation…Today, banks are not classifying loans as NPA following the Supreme Court direction, but they will have to do it once the stay is lifted. The issue has been discussed among bankers…It was recently flagged off for some companies which are going in for restructuring but may become an NPA before the restructuring process is over. Banks may ask RBI whether these companies can be considered as standard at the close of the December quarter,” said another banker.
According to another banker, not too many companies are going for loan restructuring — partly because they do not want it to be recorded in their credit history, and partly due to the stiff conditions laid down by the Kamath committee. “Also, few promoters are ready to chip in capital and give personal or corporate guarantee. Banks too are reluctant in cases where they sense that companies which may be standard account on the day of invocation (as is required) but slip into NPA soon after that,” he said. According to the regulatory timeline, the resolution framework should be invoked not later than December 31, 2020; and, lenders have to reach an intercreditor agreement within 30 days of invocation.
The resolution process has to be completed within 180 days from the date of invocation. “Even if the Supreme court takes longer to lift the stay, bank auditors may insist on higher provisioning once an account becomes NPA,” said another banker.