Debt Restructuring.docx

8/13/2019 Debt Restructuring.docx

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Debt Restructuring:

Debt Restructuring, a common practice globally, provides relief to distressed borrowers. The intent here is tosupport deserving businesses by extending loan tenures, putting interest payments on hold, converting debtinto equity, issuing fresh term or working capital loans, waiving off the interest and so on.

Restructuring of such loans, which are 100% NPA, helps bring the mark down to 18-20% (generally), furthercutting losses for banks.

1. Sector-specific Viability:

a.) Currently, prudential norms dictate that organizations seeking restructuring should provide the action plan torevive themselves in:i. 10 years for infrastructure companies.ii. 7 years for other sectors.

b.) As per strict RBI guidelines, these are considered upper limits and are allowed only in extreme cases.2. Financial Positions:a.) Various ratios to be in specified limits.

i. Return on Capital Employedii. Debt Service Coverage Ratiosiii. Gap between Internal Rate of Return(IRR) and Cost of Fundiv. Operating and Cash Breakeven Point

v. Loan Life Ratio3. Jurisdictional Limits:a. Currently infrastructure projects are given more flexibility with respect to date of commencement ofcommercial operation and restructuring affords added advantage to this se ctor.

b. The RBI also mandates that the infrastructure project should be implemented only in India.4. According to the RBIs new prudential guidelines on provisioning for restructured loans, banks will nowhave to write off 5% of the value of restructured assets instead of the current 2.75%. The rate was revised to

2.75% in November 2012, and the further hike to 5% means that banks have to provide more capital in thebalance-sheet and more provisions in their P&L account, which directly impacts their profitability. This provisionwill lead to decreased profits in the P & L account, diminished asset sizes, and increase in capital requirementto comply with Basel rules. In India, where 70% of the banking sector is owned by the Government,requirement of extra capital will dry up Government resources in a two-phased manner, (i) Decreasedcontribution from banks to the Government as part of profit distribution (ii) Increased capital infusionrequirement.


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NPA:

NPA = Non-Performing Asset

Loans and advances given by the banks to its customers is are an Asset to the bank.Just for the sake of simplicity, we can understand that a loan (an asset for the bank) turns as NPA when the EMI,principal or interest component for the loan is not paid within 90 days from the due date. Thus a Bad Loan is a n assetthat ceases to generate any income for the bank .Asset or Loan Classification Norms The assets or loans are classified as:-

1. Standard Assets2. Sub-standard Assets3. Doubtful Assets4. Loss Assets

Now, in order to ensure that banks are not affected due to defaults, RBI has directed the banks to make provisionsor set aside money when an account turns bad. Banks should, classify an account as NPA only if the interest due

and charged during any quarter is not serviced fully within 90 days from the end of the

quarter. A Loss Asset is considered uncollectible and of such little value for the bank in retaining the account on its book

and ideally, such loans should be written off. Thus, Loss assets should be written off. If loss assets are permittedto remain in the books for any reason, 100% of the outstanding should be provided for.

Apart from above, there are Guidelines by RBI for provisions under special circumstances. Unsecured exposure is defined as an exposure where the realizable value of the security, as assessed by the

bank/approved valuers/RBIs inspecting officers, is not more than 10%, ab -initio, of the outstanding exposure. Exposure includes all funded and non-funded exposures.


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Security are tangible security properly discharged to the bank and do not include intangible securities likeguarantees, etc.Restructuring of assets

Standard Assets upon restructuring > Sub -Standard Assets . Thus, NPA upon restructuring slips into further lower asset classification categories as per above table. Also, an NPA upon restructuring can also be up- graded to the standard category after observation of satisfactory

performance during the specified period i.e. on repayment of outstanding amount by th e borrower.Provisioning Coverage Ratio (PCR):

The ratio of provisioning to gross non-performing assets Indicates the extent of funds a bank has kept aside to cover loan losses. Related News: PSBs profits would have been wiped out were they asked to maintain 70% PCR

As per RBI guidelines, NPA is defined as under: Non performing asset (NPA) is a loan or an advance where;

1. interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan,

2. the account remainsout of order in respect of an Overdraft/Cash Credit (OD/CC),

3. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

4. the instalment of principal or interest there on remains overdue for two crop seasons for short duration crops,5. the instalment of principal or interest there on remains overdue for one crop season for long duration crops,

6. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transactionundertaken in terms of guidelines on securitization dated February 1, 2006.

7. in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of aderivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

Net NPA = Gross NPA (Balance in Interest Suspense account + DICGC/ECGC claims received and held pendingadjustment + Part payment received and kept in suspense account + Total provisions held).

Difference Between Bank and NBFC:

NBFCs lend and make investments and hence their activities are akin to that of banks.

However there are a few differences as given below:

NBFC cannot accept demand deposits; NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on

itself

NBFC cannot issue Demand Drafts like banks Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to

depositors of NBFCs, unlike in case of banks.

While banks are incorporated under banking companies act, NBFC is incorporated under companyact of 1956
http://currentaffairs.gktoday.in/2012/11/psbs-profits-wiped-asked-maintain-70-pcr-3018/#more-3018http://currentaffairs.gktoday.in/2012/11/psbs-profits-wiped-asked-maintain-70-pcr-3018/#more-3018http://currentaffairs.gktoday.in/2012/11/psbs-profits-wiped-asked-maintain-70-pcr-3018/#more-3018http://currentaffairs.gktoday.in/2012/11/psbs-profits-wiped-asked-maintain-70-pcr-3018/#more-3018


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Other features of NBFCs are

The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months andmaximum period of 60 months. They cannot accept deposits repayable on demand.

The deposits with NBFCs are not insured. The repayment of deposits by NBFCs is not guaranteed by RBI.

CAMELS Rating system:

C Capital AdequacyA Asset QualityM Management CapabilityE Earning PotentialL LiquidityS Systems

Heads of a banks balance sheet:

Banks Balance Sheet

CAPITAL AND LIABILITIES:

CapitalReserve and SurplusDepositBorrowingsOther Liabilities and Provision

Total

ASSETSCash an balance with RBIbalance with banks, Money at call and short

NoticeInvestmentsAdvancesFixed assetsOther Assets

Total

Contingent Liability


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PnL of a bank

IncomeInterest EarnedOther Income

ExpenditureInterest ExpandedOperating expensesProvision and

contingencies

ProfitNet Profit

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