Last Week RBI issued revised draft policy norms for restructured loans, post the working group guidelines issued in July, 2012. According to the draft norms, banks would need to step up provisioning on restructured loans by 1% from FY14 to 3.75% and to 5% by FY15 on the existing stock of restructured loans.
A report by Bank of America Merrill Lynch has said RBI’s new draft guidelines for restructured loans are likely to hit earnings of banks by at least 3-8% over the next two years. The norms, if implemented, would be applicable to new restructured accounts with effect from April 1, 2013 and in a phased manner for existing accounts.
Loans are commonly restructured to accommodate a borrower in financial difficulty and, thus, to avoid a default.
Restructured loan is a new loan that replaces the outstanding balance on an older loan, and is paid over a longer period, usually with a lower instalment amount.
Crisil Ratings, India’s largest credit rating agency had earlier projected loan restructuring to reach Rs 3.25 lakh crore by March 2013. It observed that the cumulative loan restructuring from April 2011 touched Rs 2.25 lakh crore by December 2012.
It now believes that RBI’s draft guidelines, if implemented in the current form, would increase provisioning requirement by Rs.150 billion between April 2013 and March 2015.
Crisil, however, sees two positives from the guidelines: withdrawal of regulatory forbearance for restructured loans from April 2015 and the tightening of the process of restructuring.
“These stipulations will enhance the confidence of stakeholders in banks’ asset quality and discourage large-scale restructuring activity,” it said in a press release.
Crisil report said that the impact on public sector banks will be greater, as they account for around 85 per cent of the total loan restructuring.
The financial performance of some of the state-run banks already deteriorated in October-December quarter due to provisioning requirement on restructured advances. Banks had to make 75 basis points more provisions at 2.75% on restructured loans during the quarter following RBI’s mandate.