RBI/2013-14/502
DBOD.BP.BC.No. 98/21.04.132/2013-14
February 26, 2014
All Scheduled Commercial Banks
(excluding RRBs)
All-India Term-lending and Refinancing Institutions
(Exim Bank, NABARD, NHB and SIDBI)
Dear Sir,
Framework for Revitalising Distressed
Assets in the Economy - Refinancing of Project Loans, Sale of NPA and
Other Regulatory Measures
Please refer to paragraphs 5 and 8 to 12 of the Framework
for Revitalising Distressed Assets in the Economy, placed on our
website on January 30, 2014. Accordingly, detailed guidelines on the
subject of ‘Refinancing of Project Loans’, ‘Sale of NPAs by Banks’ and
other regulatory measures are as under:
2. Refinancing of Project Loans
2.1 In terms of our circular DBOD.BP.BC.No.37/21.04.132/2008-09 dated August 27, 2008 on ‘Prudential Guidelines on Restructuring of Advances by Banks’, a
restructured account is one where the bank, for economic or legal
reasons relating to the borrower's financial difficulty, grants to the
borrower concessions that the bank would not otherwise consider.
Restructuring would normally involve modification of terms of the
advances/securities, which would generally include, among others,
alteration of repayment period/repayable amount/ the amount of
instalments/rate of interest (due to reasons other than competitive
reasons). Thus, any change in repayment schedule of a loan will render it as restructured account.
2.2 Further, in terms of DBOD.No.BP.BC.144/21.04.048-2000
dated February 29, 2000 on ‘Income Recognition, Asset Classification,
Provisioning and other related matters and Capital Adequacy Standards -
Takeout Finance’, banks can refinance their existing infrastructure
project loans by entering into take-out financing agreements with any
financial institution on a pre-determined basis. If there is no
pre-determined agreement, a standard account in the books of a bank can
still be taken over by other banks/FIs, subject to our guidelines on
‘Transfer of Borrowal Accounts from one Bank to Another’ issued vide circular DBOD.No.BP.BC-104/21.04.048/2011-12 dated May 10, 2012.
2.3 In partial modification to the above-mentioned
circulars, banks are advised that if they refinance any existing
infrastructure and other project loans by way of take-out financing,
even without a pre-determined agreement with other banks / FIs, and fix
a longer repayment period, the same would not be considered as
restructuring if the following conditions are satisfied:
-
Such loans should be ‘standard’ in the books of the existing banks, and should have not been restructured in the past.
-
Such loans should be substantially taken over (more
than 50% of the outstanding loan by value) from the existing
financing banks/Financial institutions.
-
The repayment period should be fixed by taking into account the life cycle of the project and cash flows from the project.
3. Sale of Financial Assets to Securitisation Company (SC)/Reconstruction Company (RC)
3.1 Securitisation Companies (SCs)/Reconstruction
Companies (RCs) should be construed as a supportive system for stressed
asset management with greater emphasis on asset reconstruction rather
than asset stripping. Towards this end, sale of assets to SCs/RCs is
encouraged at a stage when the assets have good chance of revival and
fair amount of realizable value. In terms of circular DBOD.No.BP.BC.96/21.04.048/2002-03 dated April 23, 2003
on “Guidelines on Sale of Financial Assets to Securitisation Company
(SC) /Reconstruction Company (RC) [Created under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002] and Related Issues”, a financial asset may be sold
to the SC/RC by any bank/FI where the asset is:
i) A NPA, including a non-performing bond/debenture, and
ii) A Standard Asset where:
(a) the asset is under consortium/multiple banking arrangements,
(b) at least 75% by value of the asset is classified as non-performing asset in the books of other banks / FIs, and
(c) at least 75% (by value) of the banks/FIs who are
under the consortium/ multiple banking arrangements agree to the sale
of the asset to SC / RC.
3.2 In addition to the above and in order to ensure better
chances of reconstruction of stressed assets, henceforth a financial
asset may be sold to the SC/RC by any bank/FI where the asset is
reported as a financial asset reported as SMA-21 by the bank/FI to Central Repository for Information on Large Credit (CRILC)2.
3.3 Further, paragraph 5 (A) (a) of the above-mentioned circular dated April 23, 2003, inter-alia, states that:
(i) When a bank/FI sells its financial assets to SC/RC, on transfer the same will be removed from its books.
(ii) If the sale to SC / RC is at a price below the net
book value (NBV) (i.e., book value less provisions held), the
shortfall should be debited to the profit and loss account of that
year.
(iii) If the sale is for a value higher than the NBV,
the excess provision will not be reversed but will be utilized to meet
the shortfall / loss on account of sale of other financial assets to SC
/ RC.
3.4 With a view to incentivising banks to recover
appropriate value in respect of their NPAs promptly, henceforth, banks
can reverse the excess provision on sale of NPA if the sale is for a
value higher than the NBV to its P&L account in the year the
amounts are received. Further, as an incentive for early sale of NPAs,
banks can spread over any shortfall, if the sale value is lower than the
NBV, over a period of two years. This facility of spreading over the
shortfall would however be available for NPAs sold up to March 31,
2015 and will be subject to necessary disclosures in the Notes to
Account in Annual Financial Statements of the banks.
3.5 It has been brought to our notice that banks sometimes
use the auction process for sale of NPAs as a price discovery
mechanism for such assets, where they invite bids from SCs/RCs and do
not accept any bid without assigning any reason. As quoting of bids
involves costly and lengthy due-diligence by SCs/RCs, such practices by
banks bring imperfection in the market by imposing disincentives on
SCs/RCs to carry out proper due-diligence. Therefore, it is advised
that banks using auction process for sale of NPAs to SCs/RCs should be
more transparent, including disclosure of the Reserve Price, specifying
clauses for non-acceptance of bids, etc. If a bid received is above the
Reserve Price and a minimum of 50 per cent of sale proceeds is in
cash, and also fulfils the other conditions specified in the Offer
Document, acceptance of that bid would be mandatory.
4. Purchase/Sale of Non-Performing Financial Assets to Other Banks
4.1 Our circular DBOD.No.BP.BC.16/21.04.048/2005-06 dated July 13, 2005
on ‘Guidelines on Sale/Purchase of Non-Performing Financial Assets’ as
consolidated and updated in our Master Circular ‘Prudential Norms on
Income Recognition, Asset Classification and Provisioning pertaining to
Advances’, inter-alia, prescribes the following:
A non-performing asset in the books of a bank shall
be eligible for sale to other banks only if it has remained a
non-performing asset for at least two years in the books of the selling
bank.
A non-performing financial asset should be held by
the purchasing bank in its books at least for a period of 15 months
before it is sold to other banks
4.2 In partial modification to the above, it is advised
that banks will be permitted to sell their NPAs to other
banks/FIs/NBFCs (excluding SCs/RCs) without any initial holding period.
However, the non-performing financial asset should be held by the
purchasing bank in its books at least for a period of 12 months before
it is sold to other banks/financial institutions/NBFCs (excluding
SCs/RCs). The extant prudential norms on asset classification of such
assets in the books of purchasing banks/FIs/NBFCs will remain
unchanged.
5. Use of Counter-cyclical/Floating Provision
5.1 In terms of our circulars DBOD.BP.BC.89/21.04.048/2005-06 dated June 22, 2006 and DBOD.BP.BC.68/21.04.048/2006-07 dated March 13, 2007
on ‘Prudential Norms on Creation and Utilisation of Floating
Provisions’, floating provisions should not be used for making specific
provisions in respect of non-performing assets or for making regulatory
provisions for standard assets. The same can be used only for
contingencies under extraordinary circumstances for making specific
provisions in impaired accounts after obtaining board's approval and
with prior permission of RBI.
5.2 Further, in terms of circular DBOD.BP.BC.87/21.04.048/2010-11 dated April 21, 2011,
on ‘Provisioning Coverage Ratio (PCR) for Advances’, countercyclical
provisioning buffer would be allowed to be used by banks for making
specific provisions for non-performing assets, inter-alia, during
periods of system wide downturn, with the prior approval of RBI.
Accordingly, RBI vide circular DBOD.No.BP.95/21.04.048/2013-14 dated February 7, 2014
on ‘Utilisation of Floating Provisions/Counter Cyclical Provisioning
Buffer’ has allowed banks, as a countercyclical measure, to utilise up
to 33 per cent of countercyclical provisioning buffer/floating
provisions held by them as on March 31, 2013, for making specific
provisions for non-performing assets, as per the policy approved by
their Board of Directors.
5.3 In addition to utilisation of countercyclical /
floating provision up to 33 per cent of such provisions held by them as
on March 31, 2013 as stated above, it has been decided that banks can
use countercyclical/floating provisions for meeting any shortfall on
sale of NPA i.e. when the sale is at a price below the net book value
(NBV) [i.e., book value less provision held], which presently requires
debit to the profit and loss account.
6. Bank Loans for Financing Promoters’ Contribution
6.1 In terms of extant instructions on Bank Loans for Financing Promoters Contribution as consolidated inour Master Circular DBOD.No.Dir.BC.14/13.03.00/2013-14 dated July 1, 2013
on ‘Loans and Advances – Statutory and Other Restrictions’, the
promoters' contribution towards the equity capital of a company should
come from their own resources and banks should not normally grant
advances to take up shares of other companies.
6.2 It has been decided that banks can extend finance to
‘specialized’ entities established for acquisition of troubled
companies subject to the general guidelines applicable to advances
against shares/debentures/bonds as contained in the above-mentioned
Master Circular and other regulatory and statutory exposure limits. The
lenders should, however, assess the risks associated with such
financing and ensure that these entities are adequately capitalized, and
debt equity ratio for such entity is not more than 3:1.
6.3 In this connection, a ‘specialized’ entity will be a
body corporate exclusively set up for the purpose of taking over and
turning around troubled companies and promoted by individuals or/and
institutional promoters (including Government) having professional
expertise in turning around ‘troubled companies’ and eligible to make
investments in the industry/segment to which the target asset belonged.
7. Credit Risk Management
7.1 Banks are advised that they should strictly follow the
credit risk management guidelines contained in our circular
DBOD.No.BP.(SC).BC.98/21.04.103/99 dated October 7, 1999 on ‘Risk
Management Systems in Banks’ and DBOD.No.BP.520/21.04.103/2002-03 dated
October 12, 2002 on ‘Guidance Notes on Management of Credit Risk and
Market Risk’.
7.2 It is reiterated that lenders should carry out their
independent and objective credit appraisal in all cases and must not
depend on credit appraisal reports prepared by outside consultants,
especially the in-house consultants of the borrowing entity.
7.3 Banks/lenders should carry out sensitivity
tests/scenario analysis, especially for infrastructure projects, which
should inter alia include project delays and cost overruns. This will
aid in taking a view on viability of the project at the time of
deciding Corrective Action Plan (CAP) as mentioned in paragraph 3 of our
circular DBOD.BP.BC.No.97/21.04.132/2013-14 dated February 26, 2014
on ‘Framework for Revitalising Distressed Assets in the Economy –
Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan
(CAP)’.
7.4 Lenders should ascertain the source and quality of
equity capital brought in by the promoters /shareholders. Multiple
leveraging, especially, in infrastructure projects, is a matter of
concern as it effectively camouflages the financial ratios such as
Debt/Equity ratio, leading to adverse selection of the borrowers.
Therefore, lenders should ensure at the time of credit appraisal that
debt of the parent company is not infused as equity capital of the
subsidiary/SPV.
7.5 Ministry of Corporate Affairs had introduced the
concept of a Director Identification Number (DIN) with the insertion of
Sections 266A to 266G of Companies (Amendment) Act, 2006. Further, in
terms of paragraph 5.4 of our Master Circular on Wilful Defaulters
dated July 1, 2013, in order to ensure that directors are correctly
identified and in no case, persons whose names appear to be similar to
the names of directors appearing in the list of wilful defaulters, are
wrongfully denied credit facilities on such grounds, banks/FIs have
been advised to include the Director Identification Number (DIN) as one
of the fields in the data submitted by them to Reserve Bank of
India/Credit Information Companies.
7.6 It is reiterated that while carrying out the credit
appraisal, banks should verify as to whether the names of any of the
directors of the companies appear in the list of defaulters/ wilful
defaulters by way of reference to DIN/PAN etc. Further, in case of any
doubt arising on account of identical names, banks should use
independent sources for confirmation of the identity of directors rather
than seeking declaration from the borrowing company.
7.7 Paragraph 2.7 of our Master Circular on Wilful Defaulters states that, “with
a view to monitoring the end-use of funds, if the lenders desire a
specific certification from the borrowers’ auditors regarding diversion
/ siphoning of funds by the borrower, the lender should award a
separate mandate to the auditors for the purpose. To facilitate such
certification by the auditors the banks and FIs will also need to ensure
that appropriate covenants in the loan agreements are incorporated to
enable award of such a mandate by the lenders to the borrowers /
auditors”.
7.8 In addition to the above, banks are advised that with a
view to ensuring proper end-use of funds and preventing
diversion/siphoning of funds by the borrowers, lenders could consider
engaging their own auditors for such specific certification purpose
without relying on certification given by borrower’s auditors. However,
this cannot substitute bank’s basic minimum own diligence in the
matter.
8. Reinforcement of Regulatory Instructions
8.1 In terms of circular DBOD.No.CAS(COD)BC.142/WGCC-80
December 8, 1980 on ‘Report of the Working Group to Review the System of
Cash Credit – Implementation’, banks were advised that before opening
current accounts/sanctioning post sale limits, they should obtain the
concurrence of the main bankers and/or the banks which have sanctioned
inventory limits. Such accounts already opened may also be reviewed in
the light of these instructions and appropriate action should be taken.
Further, in terms of Master Circular DBOD.No.Dir.BC.12/13.03.00/2013-14 dated July 1, 2013
on ‘Guarantees and Co-Acceptances’, banks should refrain from issuing
guarantees on behalf of customers who do not enjoy credit facilities
with them.
8.2 RBI reiterates the above instructions regarding
restrictions placed on banks on extending credit facilities including
non-fund based limits, opening of current accounts, etc. to
constituents who are not their regular borrowers. Banks must take
necessary corrective action in case the above instructions have not
been strictly followed. Further, RBI will ensure strict adherence by
banks to these instructions. As non-compliance of RBI regulations in
this regard is likely to vitiate credit discipline, RBI will consider
penalising non-compliant banks.
8.3 Banks are custodians of public deposits and are
therefore expected to make all efforts to protect the value of their
assets. Banks are required to extinguish all available means of
recovery before writing off any account fully or partly. It is observed
that some banks are resorting to technical write off of accounts,
which reduces incentives to recover. Banks resorting to partial and
technical write-offs should not show the remaining part of the loan as
standard asset. With a view to bring in more transparency, henceforth
banks should disclose full details of write offs, including separate
details about technical write offs, in their annual financial
statements as per the format prescribed in the Annex.
9. Registration of Transactions with CERSAI
Currently security registration, especially registration
of mortgages, is done at district level and Central Registry of
Securitisation Asset Reconstruction and Security Interest of India
(CERSAI) is generally used to register equitable mortgages. The
Government mandate to register all types of mortgages with CERSAI will
have to be strictly followed by banks. In this connection, instructions
contained in our circular DBOD.Leg.No.BC.86/09.08.011/2010-11 dated April 21, 2011
on ‘Setting up of Central Electronic Registry under the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security
Interest Act 2002’ is reiterated, i.e. transactions relating to
securitization and reconstruction of financial assets and those relating
to mortgage by deposit of title deeds to secure any loan or advances
granted by banks and financial institutions, as defined under the
SARFAESI Act, are to be registered in the Central Registry.
10. Board Oversight
10.1 The Board of Directors of banks should take all
necessary steps to arrest the deteriorating asset quality in their
books and should focus on improving the credit risk management system.
Early recognition of problems in asset quality and resolution envisaged
in these guidelines requires the lenders to be proactive and make use
of CRILC as soon as it becomes functional.
10.2 Boards of banks should put in place a policy for
timely submission of credit information to CRILC and accessing
information therefrom, prompt formation of Joint Lenders’ Forums (JLFs)3, monitoring the progress of JLFs and adoption of Corrective Action Plans (CAPs)4, etc. There should be a periodical review, say on a half yearly basis, of the above policy.
10.3 The boards of banks should put in place a system for
proper and timely classification of borrowers as wilful defaulters
or/and non-cooperative borrowers5. Further, Boards of banks should periodically review the accounts classified as such, say on a half yearly basis.
Yours faithfully,
(Rajesh Verma)
Chief General Manager
Disclosure of Write-Offs & Technical Write-Offs
Instructions contained in our circular DBOD.BP.BC.No. 79 /21.04.018/2009-10 dated March 15, 2010 on ‘Additional Disclosures by banks in Notes to Accounts’ specifically
require banks to disclose the amounts written off during the year
while giving details of movement in non-performing assets (NPAs). The
format specified in the said circular stands modified as under.
(Amount in Rs. crore)
|
Particulars
|
Current year
|
Previous year
|
Gross NPAs6 as on 1st April of particular year (Opening Balance) |
|
|
Additions (Fresh NPAs) during the year |
|
|
Sub-total (A) |
|
|
Less:- |
|
|
(i) Upgradations |
|
|
(ii) Recoveries (excluding recoveries made from upgraded accounts) |
|
|
(iii) Technical/ Prudential7 Write-offs |
|
|
(iv) Write-offs other than those under (iii) above |
|
|
Sub-total (B) |
|
|
Gross NPAs as on 31st March of following year (closing balance) (A-B) |
|
|
Further banks should disclose the stock of technical write-offs and the recoveries made thereon as per the format below:
(Amount in Rs. crore)
|
Particulars
|
Current year
|
Previous year
|
Opening balance of Technical/ Prudential written-off accounts as at April 1 |
|
|
Add: Technical/ Prudential write-offs during the year |
|
|
Sub-total (A) |
|
|
Less: Recoveries made from previously technical/ prudential written-off accounts during the year (B) |
|
|
Closing balance as at March 31 (A-B) |
|
|
|
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