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Banks face tighter loan rejig norms

Mumbai, Oct. 30: The Reserve Bank of India today raised the provisioning requirement for restructured corporate debt to 2.75 per cent from 2 per cent at present, deepening worries for some public sector banks that have been struggling to deal with the burden of bad loans amid a slowdown.

Analysts said the move would hurt the Bank of India, Allahabad Bank, Corporation Bank and Punjab National Bank among others.

Banks have been in talks to recast the loans they extended to companies that have seen their businesses crater during the slowdown.

The corporate debt restructuring (CDR) mechanism is one mechanism through which a consortium of banks agrees to relax payment terms for roiled companies. The restructuring involves an extension of the loan tenure, reduction in the interest rate or conversion of debt into equity.

According to the current practice, such assets can be upgraded to the standard category (performing loans) after a company shows satisfactory performance in the year from the date when the first payment of interest or instalment of principal falls due under the terms of restructuring package.

Data from the RBI shows the number of CDR cases has jumped to a high of 392 as on March this year from 225 in March 2009, taking the amount at stake to Rs 2,06,493 crore from Rs 95,815 crore.

However, there have been also cases where restructured loans have slipped back into the NPA category. As per the current estimates, around 15 per cent of the total restructured book have slipped into the bad loan category for the industry as a whole.

The central bank had appointed a working group headed by B. Mahapatra to review existing guidelines on restructuring of advances by banks. The working group had recommended that due to the risk in assets classified as standard after restructuring, the provision requirement on these accounts should be increased from 2 per cent to 5 per cent in a phased manner over a two-year period. I t had suggested that the rate should be raised to 3.5 per cent in the first year (this fiscal) and 5 per cent in the second year.

RBI deputy governor Anand Sinha said the RBI had decided to raise the provisioning requirement to 2.75 per cent with immediate effect because half the year was already over. He added that draft guidelines pursuant to the recommendations made by the Mahapatra committee would be put out by the end of January after consultations with banks.

Kashyap Jhaveri, analyst at Emkay Global Financial Services, said the impact of the higher provisioning on banks’ profit before tax would range between 0.1 and 4.5 per cent in the current fiscal. Bank of India would be worst hit at 4.5 per cent. He estimated the impact on Allahabad Bank at 3.4 per cent, Corporation Bank at 3.3 per cent, and PNB at 2.9 per cent.

According to his estimates, Allahabad Bank would have to make an extra provision of Rs 80.5 crore. The provisioning burden on Bank of India would rise by Rs 160 crore. The burden would go up by Rs 125 crore in the case of Bank of Baroda, Rs 105 crore for Canara Bank. and Rs 209 crore for PNB.

SBI chairman Pratip Chaudhuri, however, told newspersons that the impact on the lender due to the higher provision would not be significant, estimating it at Rs 300 crore.

Banks were also instructed to put in place an effective mechanism by the end of December to share information on credit, derivatives and unhedged foreign currency exposures.

The RBI said that any sanction of fresh loans/ad-hoc loans/renewal of loans to new or existing borrowers with effect from January 1 should be made only after obtaining or sharing necessary information.

It also asked banks to put in place a proper mechanism to rigorously evaluate the risks arising from unhedged foreign currency exposures of corporates and price them in the credit risk premium.

 
 
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