Bank Audit Banks cannot reschedule/restructure/ renegotiate borrowal accounts with retrospective effect

  1. While a restructuring proposal is under consideration, the usual asset classification norms would continue to apply.
  2. The process of restructuring can be initiated by the bank in deserving cases subject to customer agreeing to the terms and conditions.
  3. No account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package.
  4. The borrowers indulging in frauds and malfeasance are ineligible for restructuring. However, in old cases where the manner of classification of a borrower as a wilful defaulter was not transparent and bank satisfies itself that the borrower is in a position to rectify the wilful default, the restructuring of such cases may be done with board’s approval and for accounts the restructuring under the CDR Mechanism may be carried out with the approval of the Core Group
  5. BIFR cases are eligible for restructuring after their express approval and ensuring that all the formalities in seeking the approval from BIFR are completed before implementing the package.
    • Asset Classification Norms
  6. The restructuring/rescheduling/renegotiation of the terms of loan agreement could take place:
  • before commencement of commercial operations;
  • after commencement of commercial operations but before the asset has been classified as sub standard;
  • after commencement of commercial operations and after the asset has been classified as substandard.
  1. Upon restructuring, the accounts classified as ‘standard assets’ would get reclassified as ‘substandard assets’ and account which is already NPA would continue to have the same classification and slip in to further lower asset classification as per the extant asset classification norms.
  2. Any additional finance may be treated as ‘standard asset’, up to a period of one year after the first interest/principal payment, whichever is earlier, falls due under the approved restructuring package.

No account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower as per the terms of restructuring package.

All restructured accounts which have been classified as NPA upon restructuring, would be eligible for up-gradation to the ‘standard’ category after observation of ‘satisfactory performance’ during the specified period. Specified period means a period of one year from the commencement of the first payment of interest or principal whichever is later, on the credit facility with longest period of moratorium under the terms of restructuring package.

  1. However, accounts of the borrower can continue to be classified in existing asset classification category subject to fulfilment of conditions enumerated in para 7 below.

6.4. Provisioning Norms:

  1. The total provisions required against an account under restructuring would be normal provisions plus provisions in lieu of diminution in the fair value of the advances.
  2. Normal provision is discussed in para 8.
  3. Diminution in fair value of the advance is difference between fair value of advance before and after restructuring. Fair value of advance before/after restructuring is computed as the present value of cash flows representing the interest at the existing rate/revised rate charged on the advance before/after restructuring and discounted at an appropriate rate. The difference between two fair values would be the diminution in value of advance which would be provided for.
  4. The diminution in the fair value would be required to be re-computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account. Consequently, banks would be required to provide for the shortfall in provision or reverse the amount of excess provision.
  5. As an alternative to the methodology prescribed above for computing the amount of diminution in the fair value, banks will have the option of notionally computing the amount of diminution in the fair value and providing therefore, at five percent of the total exposure, in respect of all restructured accounts where the total dues to bank are less than ? 1 crore. Restructured advances classified as standard or classified as NPA but subsequently upgraded would attract higher provision.