Tighter corporate debt recast norms soon, says RBI

Worried over the rising instances of loan restructuring, which hit a record high last fiscal, the Reserve Bank on Friday said it will issue final guidelines on the prudential norms on restructuring of advances by lenders by the end of the month.

The move comes even as the monetary authority had last October increased the provisioning for standard restructured loans to 2.75 per cent from 2 per cent and had said it would gradually go up to 5 per cent of the recast amount.

The latest step comes following the recommendations of a RBI working group, headed by B Mahapatra, to review the existing prudential norms on restructuring of advances by banks/financial institutions. Following this, the RBI had issued the draft norms on January 31.

As per the data from CDR cell, the recast loan books of the banks reached an alarming proportion in recent past following the sharp deterioration in growth and the resultant defaults by borrowers.

As of December last, the total CDR book of banks touched a whopping Rs 2.12 trillion from 362 accounts, which is nearly 50 per cent more than the previous fiscal, with Q3 of last fiscal alone seeing lenders restructuring loans close to Rs 24,600 crore, up from Rs 19,544 crore in Q2.

Under CDR (corporate debt restructuring), commercial banks typically extend repayment period to companies and offer a moratorium and reduce lending rates, among other things.

In the event of a CDR account turning bad, the provisioning liability shoots up to 15 per cent from 0.4 per cent for standard loans.

As of Q3 of FY13, banks recast loans worth nearly Rs 62,100 crore, around 50 per cent more than the recast loans in the whole of last year.

Meanwhile, the RBI said it has decided to carve out a sub-sector within the commercial real estate, called the residential housing sector, and draft separate norms on risk weights and provisioning by the end of June.

"It has been observed the residential housing complex sector under poses lower risk than the other components of realty sector. Accordingly, it is proposed to carve out a sub- sector for housing realty," RBI said in the policy document.

The move will help banks and the residential realty market. It flows from RBI realisation that residential realty poses lesser risks than commercial realty.