Restructuring of bank advances
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Transcript of Restructuring of bank advances
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V Seshadri
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Points in RBI audit RBI audit comments suggestionsHousing loan policyof bank permittedsanction of housingloans to non-individualconstitutions
Sanction of housing loans to entities which were notnatural persons was considered inappropriate & wasnot in line with RBI master circular on Housingfinance. Accordingly, the reporting was to be revised& internal classification of bank also needed to beamended
Bank had classifiedbuyout loans as PSLon the basis ofoutstanding
PSL classification need to be done based on originallimit amount sanctioned by the Bank/FI from whomportfolio was bought & as such the eligibility of suchclassification as PSL was not ascertainable.
Claims not
acknowledged asdebt- Impact of courtdecision
In six cases it was observed that the decision had
gone against the bank in lower court & the bank hadfiled appeal in the upper court. In view of thisposition, additional provision was suggested
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Actuals Should have been
Date CC LC Total30-3-11 30.00 20.00 50.00
30-6-11 Devolved
30-9-11 50.00 0.00 50.00
Date CC LC Total30-3-11 30.00 20.00 50.00
30-6-11 Devolved
30-9-11 30.00 0.00 30.00
The banks credit policy had not prescribed the process to be followedfor monitoring & asset classification in case of devolvement of LCs. Thebank parked each devolved LC in a separate account for ease of
monitoring. While calculating the outstanding for the borrower, thedevolved amount outstanding was not reckoned together with principaloperating account for asset classification. The case the outstanding inthe principal operating account taken with the outstanding due todevolved LCs exceeded fund based limit of the borrower, the accountwas classified as NPA
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1. Loans against equitable mortgage ofproperty under Home Equity product
2.No primary security
3. Only collateral security of land & building 4. Loans were treated as part of regulatory
retail & risk weight of 75% was applied
5. On above basis, portfolio classified as
Commercial Real Estate (CRE) by RBI 6. Suggested additional risk weight of 25%
since classified as CRE
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RBI Governor Subbarao article in DNA on 17-
12-2011has stated the following CA profession has shied away from its
responsibility in relation to prevention & earlydetection of frauds & has warned that other
agencies could displace auditors if CAs were notwilling to provide such services, depriving them of apotentially expanding opportunity
It was possible to reduce the frequency with whichpublic sector banks (PSBs) are audited by using
technologies such as core banking & centralisedrecord keeping
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Currently the cost of audit of PSBs is significantlyhigher than the cost of audit of comparable privatesector banks. However, the institute has beenresisting this because it would mean a reduction inwork for its members
He also drew attention to differences inidentification of NPAs by the supervisory inspectionconducted by RBI & certified auditors. In RBIs view, in certain cases, the statutory auditors
have underestimated the extent of NPAs & required
provisioning. Since RBI, as the supervisor of thebanking system, relies & leverages on the work doneby auditors, the profession should effectively addressthis issue
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Overdue Any amount due to the bank under any credit
facility is overdue if it is not paid on the due datefixed by the bank
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Out of Order statusAn account should be treated as out of order
if the outstanding balance remains continuously inexcess of the sanctioned limit/drawing power
OR In circumstances where the outstanding balance in the
principal operating account is less than the sanctionedlimit/drawing power, but
There are no credits continuously for 90 days as on the
date of Balance Sheet of the bank OR
The credits are not enough to cover the interest debitedduring the same period
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If any advance, including bills purchased and discounted,becomes NPA, the entire interest accrued and credited toincome account in the past periods, should be reversed if
the same is not realised. This will apply to Governmentguaranteed accounts also.
In respect of NPAs, fees, commission and similar incomethat have accrued should cease to accrue in the currentperiod and should be reversed with respect to past
periods, if uncollected.
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If arrears of interest and principal are paid bythe borrower in the case of loan accountsclassified as NPAs, the account should nolonger be treated as non-performing and may
be classified as standard accounts.
With regard to upgradation of a restructured/rescheduled account which is classified asNPA contents of paragraphs 11.2 and 14.2 inthe Part B of RBI Master circular will beapplicable.
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Restructuring of advances could take place in thefollowing stages : before commencement of commercial production /
operation; after commencement of commercial production /
operation but before the asset has been classified as'sub-standard';
after commencement of commercial production /operation and the asset has been classified as 'sub-standard' or 'doubtful'.
The accounts classified as 'standard assets'should be immediately re-classified as 'sub-standard assets' upon restructuring.
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The non-performing assets, upon restructuring, would
continue to have the same asset classification as prior torestructuring and slip into further lower asset classificationcategories as per extant asset classification norms withreference to the pre-restructuring repayment schedule.
All restructured accounts which have been classified as non-
performing assets upon restructuring, would be eligible forup-gradation to the 'standard' category after observation of'satisfactory performance' during the 'specified period(Specified Period means a period of one year from the datewhen the first payment of interest or instalment of principal
falls due under the terms of restructuring package) In case, however, satisfactory performance after the specified
period is not evidenced, the asset classification of therestructured account would be governed as per the applicableprudential norms with reference to the pre-restructuring
payment schedule.
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Any additional finance may be treated as 'standard asset', up to aperiod of one year after the first interest / principal payment,whichever is earlier, falls due under the approved restructuringpackage. However, in the case of accounts where theprerestructuring facilities were classified as 'sub-standard' and'doubtful', interest income on the additional finance should berecognised only on cash basis. If the restructured asset does not
qualify for upgradation at the end of the above specified one yearperiod, the additional finance shall be placed in the same assetclassification category as the restructured debt.
In case a restructured asset, which is a standard asset onrestructuring, is subjected to restructuring on a subsequentoccasion, it should be classified as substandard. If the restructured
asset is a sub-standard or a doubtful asset and is subjected torestructuring, on a subsequent occasion, its asset classification willbe reckoned from the date when it became NPA on the firstoccasion. However, such advances restructured on second or moreoccasion may be allowed to be upgraded to standard category afterone year from the date of first payment of interest or repayment ofprincipal whichever falls due earlier in terms of the current
restructuring package subject to satisfactory performance.
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The special regulatory treatment has the
following two components: Incentive for quick implementation of the
restructuring package.
Retention of the asset classification of therestructured account in the pre-restructuring asset
classification category
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For all projects financed by the FIs/ banksafter 28th May, 2002, the date of completionof the project should be clearly spelt out atthe time of financial closure of the project.
All project loans have been divided into thefollowing two categories : Project Loans for infrastructure sector Project Loans for non-infrastructure sector
'Project Loan' would mean any term loanwhich has been extended for the purpose ofsetting up of an economic venture.
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Standard Assets Banks are required to make general provisions for standard assets
for the funded outstanding on a global portfolio basis. Theseprovisions which are in the range of 0.25% to 1.00% on theoutstanding loans are required and are based on the type ofexposure. Provisions for housing loans at teaser rates would be2.00% and will reduce to 0.40% after one year from the date on
which the teaser rates are reset at higher rates if the accountsremain standard.
Derivative exposures, such as credit exposures computed as perthe current marked to market value of the contract arising onaccount of the interest rate and foreign exchange derivativetransactions and gold shall also attract the provisioning
requirement applicable to the loan assets in the standardcategory, of the concerned counterparties. All conditionsapplicable for the treatment of the provisions for standard assetswould also apply to the aforesaid provisions for derivatives andgold exposures.
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Sub Standard Assets A general provision of 15.0% on total outstanding loans is
required without making any allowance for the Export CreditGuarantee Corporation of India (ECGC) guarantee cover andsecurities available. The unsecured exposures which are identifiedas sub-standard would be subject to an additional provision of10.0% (i.e. a total of 25.0% on the outstanding balance). However,
unsecured loans classified as sub-standard, where certainsafeguards such as escrow accounts are available, will attract anadditional provision of 5.0% (i.e. a total of 20.0% on theoutstanding balance). Unsecured exposure is defined as an exposure where the realizable
value of security, as assessed by the bank, approved valuers and theRBIs inspecting officers, is not more than 10.0%, ab-initio, of theoutstanding exposure. Exposure shall include all funded and non-funded exposures (including underwriting and similar commitments).Security will mean tangible security properly discharged to the bank andwill not include intangible securities such as guarantees and comfortletters.
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Doubtful assets A 100.0% provision is made against the unsecured
portion of the doubtful asset. The value assigned tothe collateral securing a loan is the realizable valuedetermined by third party appraisers. In cases
where there is a secured portion of the asset,depending upon the period for which the assetremains doubtful, a 25.0% to 100.0% provision isrequired to be made against the secured asset asfollows:
Up to one year: 25.0% provision One to three years: 40.0% provision More than three years: 100.0% provision
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Loss assets The entire asset is required to be written off or provided for.
In June 2006, the RBI issued prudential standards on the creation andutilization of floating provisions (provisions which are not made in respectof specific non-performing assets or are made in excess of regulatoryrequirements for provisions for standard assets). The standards state thatfloating provisions can be used only for contingencies under extraordinarycircumstances for making specific provisions in impaired accounts afterobtaining approval from the banks board of directors and with the priorpermission of the RBI. Floating provisions must be held separately andcannot be reversed by credit to the profit and loss account. Until theutilization of such provisions, they can be netted off from gross non-performing assets to arrive at disclosure of net non-performing assets, oralternatively, can be treated as part of Tier II capital within the overallceiling of 1.25% of total risk-weighted assets. We have elected to treat
floating provisions as part of Tier II capital. Further, floating provisionswould not include specific voluntary provisions made by banks foradvances at rates which are higher than the stipulated rates andconsistently adopted from year to year.
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With a view to ensuring counter-cyclicalprovisioning in the banking system, the RBI hasmandated that banks should augment theirprovisioning cushions consisting of specificprovisions against NPAs as well as floating
provisions (to the extent not used at Tier IIcapital), and ensure that their total ProvisioningCoverage Ratio (PCR), including the abovefloating provisions, is not less than 70.0%. Thesurplus of provisions under the PCR vis--vis
that required as per prudential specificprovisioning norms is styled as a counter-cyclicalbuffer.
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A provision is made equal to the net presentvalue of the reduction in the rate of intereston the loan over its maturity
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