Changes in the Prudential Norms, Provisioning by RBI

Background

During the year 2012 RBI constituted a working group headed by Sh. B. Mahapatra to review the existing prudential guidelines on restructuring of advances by Banks/FI’s. The working group made certain recommendations and after receiving comments/suggestions RBI came out with circular No. DBOD.BP.BC.No.99/ 21.04.132/2012-13 dated May 30, 2013. Some of the changes become effective immediately and for others will become effective from April 1, 2015.

A bird’s eye view of the various changes proposed are is as under :-

Many of the changes have far reaching implications for the lenders and their borrowers. In times to come, due to increased provisioning the profitability of the banks is likely to go down. ICRA (rating agency) has estimated the NPA’s percentage is likely to increase to 5.5% to 6.5% from the present nearly 3.5%.

With the prevailing economic conditions and the GDP growth rate being what it is,  the estimates may come true.

The details of changes are as under :-

1.       Changes in forbearance norms for restructured accounts.

Present Norms

The norms prescribe Incentive for quick implantation of package  and retention of asset classification in pre-restructuring category subject to fulfilment of certain conditions. Accordingly, during pendency of the application lender has to follow the usual asset classification norms meaning whereby standard accounts are allowed to retain their asset classification and NPA accounts are allowed not to deteriorate further in asset classification on restructuring.

Condition

The restructuring package is implemented within 90 days of receipt of application, lender allowed to retain the present classification for Non-CDR cases. In case of CDR cases time limit is 120 days.

Benefit is also available to projects under implementation (Infrastructure and others) which have passed their ‘Date of Commencement of Commercial Operations’ [DCCO].  

Change

With the recent circular the existing asset classification benefits available on restructuring on fulfilling certain conditions will be withdrawn for all restructured accounts effective from April 1, 2015 with the exception of provisions related to changes in DCCO in respect of infrastructure as well as non-infrastructure project loans.

Implication of the change

It implies that a standard account on restructuring (for reasons other than change in DCCO) 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.

This will increase substantially the provisioning for the Banks/FI’s.

Date of implementation for this change is April 1, 2015

Incidentally vide point no. 8 of the same circular RBI has given incentive for quick implementation of restructuring package for non-CDR restructurings. If the restructuring package is implemented within 120 days (90 days as per earlier guidelines) of receipt of application, lender allowed to retain the present classification for Non-CDR cases. This will continue to apply till new norms kick in i.e. upto 31.3.2015.

2.       Change in Date of Commencement of Commercial Operations

This change pertains to project under implementation which are classified into two categories viz.

a.       Infrastructure projects

b.      Non infrastructure projects

At the time of appraisal/financial closure a date for Commencement of Commercial Operations (DCOC) is specified. Due to uncertainties involved in implementation, at times, the project is not able to commence commercial operations by the appointed date.  In terms of the earlier guidelines, if the project is unable to commence commercial operations as per the DCOC specified, the account was to be downgraded to NPA. The period envisaged was 6 months for non-infrastructure projects and 2 years for infrastructure projects.

The lender on request of the borrower and upon satisfaction of certain terms and conditions as laid down under circular no. DBOD.No.BP.BC.9 /21.04.048/2012-13 dated July 2, 2012 could extend the DCOC and retain the present status of the account.

RBI in its present circular has made following changes in this respect :-

a.       For other projects banks can extend the prescribed period of ‘six months from the original DCCO’ to ‘one year from the original DCCO’ within which a non-infrastructure project will have to commence commercial operation for complying with the provisions in this regard.

As a consequence of the above, if the delay in commencement of commercial operations extends beyond the period of one year from the date of completion as determined at the time of financial closure, banks can prescribe a fresh DCCO and retain the “standard” classification by undertaking the restructuring of accounts in accordance with the provisions in this regard provided that the fresh DCCO does not extend beyond a period of 2 years from the original DCCO.

This will help those borrowers and banks which are stuck up with projects which are suffering from time over run.

b.      The circular specifically provides that mere extension of DCCO would not be considered as restructuring, if the revised DCCO falls within the period of two years and one year from the original DCCO for infrastructure projects and non-infrastructure projects respectively. In such cases the consequential shift in repayment period by equal or shorter duration (including the start date and end date of revised repayment schedule) than the extension of DCCO, would also not be considered as restructuring provided all other terms and conditions of the loan remain unchanged. As such project loans will be treated as standard assets in all respects.

c.       As regards Commercial Real Estate Projects (CRE) mere extension of DCCO even in the case of CRE projects would not be considered as restructuring, if the revised DCCO falls within the period of one year from the original DCCO and there is no change in other terms and conditions except possible shift of the repayment schedule and servicing of the loan by equal or shorter duration compared to the period by which DCCO has been extended.

d.      PPP Projects :- PPP Projects where the DCCO is extended due to shift in appointed date will not be considered restructured provided followings are satisfied :-

                                             i.            Project is an infrastructure project under PPP model awarded by a public authority;

                                           ii.            The loan disbursement is yet to begin;

                                          iii.            The revised date of commencement of commercial operations is documented by way of a supplementary agreement between the borrower and lender; and

                                         iv.            Project viability has been reassessed and sanction from appropriate authority has been obtained at the time of supplementary agreement.

                                           v.            Viability is reassessed and the Board of the bank is satisfied in this regard.

e.      The circular reiterates that norms regarding not treating an account as a restructured account on account of any change in the repayment schedule of a project loan caused due to an increase in the project outlay on account of increase in scope and size of the project, subject to certain conditions, will continue to remain effective.

3.       General Provisions on Restructured Advances

As per the present guidelines banks are required to make a provision of 2.75% on restructured standard accounts for different periods depending on the way an account is classified as restructured standard account, i.e. either abinitio or on upgradation or on retention of asset classification due to change in DCCO of infrastructure and non-infrastructure projects.

Such provisioning is enhanced to 5% in phased manner by RBI as per table given below :-