Asset classification benefits :
Subject to the compliance with the undernoted conditions in addition to the adherence to the prudential framework laid down in para 17 of the Master Circular DBR.No.BP.BC.2/21.04.048/2015-16 on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated July 1, 2015:
(i) In modification to para 17.2.1 of aforesaid Master Circular, an existing ‘standard asset’ will not be downgraded to the sub-standard category upon restructuring.
(ii) In modification to para 17.2.2 of aforesaid Master Circular, 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.
However, these benefits will be available subject to compliance with the following conditions:
i) The dues to the bank are ‘fully secured’ as defined in Annex – 5 of the Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated July 1, 2015. The condition of being fully secured by tangible security will not be applicable in the following cases:
(a) MSE borrowers, where the outstanding is up to Rs. 25 lakh.
(b) 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.
ii) The unit becomes viable in 8 years, if it is engaged in infrastructure activities, and in 5 years in the case of other units.
iii) 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.
iv) Promoters’ sacrifice and additional funds brought by them should be a minimum of 20 per cent of banks’ sacrifice or 2 per cent of the restructured debt, whichever is higher. This stipulation is the minimum and banks may decide on a higher sacrifice by promoters depending on the riskiness of the project and promoters’ ability to bring in higher sacrifice amount. Further, such higher sacrifice may invariably be insisted upon in larger accounts, especially CDR accounts. The promoters’ sacrifice should invariably be brought upfront while extending the restructuring benefits to the borrowers. The term ‘bank’s sacrifice’ means the amount of ‘erosion in the fair value of the advance’; or “total sacrifice”, to be computed as per the methodology enumerated in para 3.98 (i) and (ii) above.
(Prior to May 30, 2013, if banks were convinced that the promoters face genuine difficulty in bringing their share of the sacrifice immediately and need some extension of time to fulfill their commitments, the promoters could be allowed to bring in 50% of their sacrifice, i.e. 50% of 15%, upfront and the balance within a period of one year. However, in such cases, if the promoters fail to bring in their balance share of sacrifice within the extended time limit of one year, the asset classification benefits derived by banks will cease to accrue and the banks will have to revert to classifying such accounts as per the asset classification norms as given in para 17.2 of aforesaid Master Circular.
v) Promoter’s contribution need not necessarily be brought in cash and can be brought in the form of de-rating of equity, conversion of unsecured loan brought by the promoter into equity and interest free loans.
vi) The restructuring under consideration is not a ‘repeated restructuring’ as defined in para (v) of Annex – 5 of the Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances dated July 1, 2015.
As per para 20.2.3 of the Master Circular dated July 1, 2015 the extant incentive for quick implementation of restructuring package and asset classification benefits (paragraphs 3.121 to 3.123 (available on restructuring on fulfilling the conditions will however be withdrawn for all restructurings effective from April 1, 2015 with the exception of provisions related to changes in DCCO in respect of infrastructure as well as non-infrastructure project loans. It implies that with effect from April 1, 2015, a standard account on restructuring (for reasons other than change in DCCO and) would be immediately classified as substandard on restructuring as also the non-performing assets, upon restructuring, would continue to have the same asset classification as prior to restructuring and slip into further lower asset classification categories as per the extant asset classification norms with reference to the pre-restructuring repayment schedule.
Accelerated Provisioning
In cases where banks fail to report SMA status to the accounts to CRILIC or resort to methods with the intent to conceal the actual status of the accounts or evergreen the accounts, banks will be subjected to accelerated provisioning for these accounts as under:
Asset Classification |
Period as NPA |
Current Provisioning |
Revisedaccelerated provisioning (%) |
Sub Standard |
Upto 6 months |
15 |
15 (no change) |
(Secured) |
6 months to 1year |
15 |
25 |
Sub Standard (unsecured ab initio) |
Upto 6 months6 months to 1 year |
25(other than infrastructure loans)20 (infrastructure loans)Same as above |
2540 |
Doubtful I |
2nd year |
25(secured portion)
|
40100 |
Doubtful II |
3rd & 4th year |
40 (secured portion)100 (unsecured portion) |
100 for both secured and unsecured portion |
Doubtful III |
5year onwards |
100 |
100 |
The accelerated provisioning requirement as above is not only for non reporting or delayed reporting or wrong reporting of SMA status bit also for delay/refusal in implementation of package already agreed by lender under CAP by JLF.