Probably concerned at the rising number of loan recasts going wrong, the Reserve Bank of India (RBI) has asked lenders to increase provisioning for accounts that may not have yet failed corporate debt restructuring (CDR) but do not meet conditions stipulated in the master restructuring agreement. While the exact increase in the quantum of provisioning is not known, these will need to be maintained from April.

Two bankers confirmed to FE that the central bank had sent them a list of such accounts for which more capital needed to be set aside. They added that the tighter norms would apply to accounts recast outside the purview of the CDR cell.

The loan recasts of several firms have failed this year with the involved amount for the first eight months of FY16 estimated at Rs 22,303 crore. The move to provision adequately for accounts where loans have been recast in the CDR cell is promoted by concerns of higher failed restructurings and especially errant borrowers, bankers explained.

Since April 2015, banks have been compelled to raise provisions for accounts that slipped into the CDR cell to 15% from 5% earlier. However, the central bank appears to have found instances where promoters have not pledged an adequate quantum of shares or not created required securities.

RBI governor Raghuram Rajan had said recently that he would like to see banks clean up their books by March 2017.

However, with the economy still sluggish and the collapse in commodity prices, lenders have continued to report slippages from their restructured book. For instance, India’s largest private sector lender ICICI Bank reported fresh bad loans of R2,242 crore in the September quarter, of which R931 crore originated from the restructured book.

“If the CDR cell classifies an account as having failed, banks must treat it as an NPA. But the RBI is now taking pre-emptive action by asking us to provide more for accounts that are inherently weak,” one of the bankers said.

Another banker said this list followed the RBI’s list of 150 truant borrowers whose exposures were not being treated in a uniform manner across lenders. Banks have been told to make at least 50% of the total provisions for those accounts in the December quarter and the rest in Q4 FY16, sources said.

“The latest RBI list of failed CDR accounts will not match the bank-wise list of failed CDR cases because the RBI has classified any account where the package has not been implemented within 120 days of the letter of approval as failed, while bankers have historically shown more leniency,” he said.

If the performance of a company exceeds CDR projections by 25% or more, the company is identified for a successful exit. However, if it fails to meet the projections, then the package fails. Bankers said among the main reasons for loan restructurings not working out is the inability of the promoters to infuse the requisite equity capital into the company in the defined period along with the delay in repaying the loan after the moratorium. Packages also fail if the company is unable to sell its non-core assets.

The RBI had allowed lenders to classify restructured accounts under the restructured-standard category till March 2015 with a provision of 5%. However, from April banks have been instructed to classify restructured accounts as NPAs and provide at least 15% for fresh recasts. RBI data showed NPA for the banking system had risen to 5.1% of total assets from 4.6% in March.(Financial Express)