Bank Audit Special Regulatory Treatment for Asset Classification

Reserve Bank of India has stipulated special regulatory frame work for asset classification, in modification to guidelines as enumerated in para 6 above. This special treatment will be available to the borrowers engaged in important business activities, subject to compliance with certain conditions as enumerated herein and is not extended to the following categories of advances:

  1. Consumer and personal advances;
  2. Advances classified as capital market exposures;
  • Advances classified as commercial real estate exposures

Thus benefit of special regulatory frame work would be available subject to compliance of conditions stipulated in the paragraph 7.1 below. If these conditions are not complied then guidelines as discussed in para 6 would apply to restructured accounts.

  • Elements of special regulatory framework

The special regulatory treatment has the following two components:

  • Incentive for quick implementation of the

restructuring package.

As an incentive for quick implementation of the package, if the approved package is implemented by the bank as per the following time schedule, the asset classification status may be restored to the position which existed when the reference was made to the CDR Cell or when the restructuring application was received by the bank.

  • Within 120 days from the date of approval under the CDR Mechanism.
  • Within 120 days from the date of receipt of application by the bank in other cases.
  • Retention of the asset classification of the restructured account in the pre­restructuring asset classification category Subject to the compliance with the

undernoted conditions in addition to the adherence to the prudential framework laid down in para 6 above,

  • An existing ‘standard asset’ will not be downgraded to the sub-standard category upon restructuring.
  • During the specified period, the asset classification of the sub-standard/doubtful accounts will not deteriorate upon restructuring, if satisfactory performance is demonstrated during the specified period.

These benefits will be available subject to compliance of the following conditions:

  1. The dues to the bank are ‘fully secured’ by tangible assets except in the following

cases:

  1. SSI borrowers, where the outstanding is up to ?25 lakh.
  2. Infrastructure projects, provided the cash flows generated from these projects are adequate for repayment of the advance, the financing bank(s) have in place an appropriate mechanism to escrow the cash flows, and also have a clear and legal first claim on these cash flows.
  3. The unit becomes viable in 8 years, if it is engaged in infrastructure activities, and in 5 years in the case of other units.
  • The repayment period of the restructured advance including the moratorium, if any, does not exceed 15 years in the case of infrastructure advances and 10 years in the case of other advances. The aforesaid ceiling of 10 years would not be applicable for restructured home loans; in these cases the Board of Directors of the banks should prescribe the maximum period for restructured advance keeping in view the safety and soundness of the advances.
  1. Promoters’ sacrifice and additional funds

Promoter’s personal guarantee should be obtained
in all cases of restructuring. Corporate guarantee
cannot be accepted as a substitute for personal
guarantee. However, the same can be accepted
in cases where promoters of a company are not
individuals.