Prudential Guidelines on Restructuring of Advances by Banks and Financial Institutions

All over the world, banks restructure loans and advances – not with a view to hide losses, but to enable corporate borrowers survive tough times. The regulators allow this practice. This is a legitimate banking practice, created to protect the productive assets of the society. However, in the aftermath of the financial crisis and the prolonged slowdown of the economy, increasing numbers of corporate customers are approaching banks for re-structuring their loans. To help these corporate customers RBI, in August 2008 permitted banks to restructure such loans.

This did help corporate customers tide over the worst of the crisis. The essence of the relaxation given by RBI was to extend “regulatory forbearance” to keep these loans as standard. However, as the crisis unfolded, there was a felt need to align the Indian regulations with global best practices and also remove some of the ambiguities in the guidelines. This turned out to be a double-edged sword. While it did help the troubled corporate customer, it also provided a loophole for some sharp practices. According to data released by RBI – see accompanying table – there was a tremendous surge in the level of assets that were converted into standardassets by re-structuring, surpassing the quantum of gross NPA’s of the banking system.

To add to the misery, there arereports that estimate the restructured standard assets to rise to Rs.325,000 crores over the next one year. A cursory look at the figures reveals some startling insights. The Gross NPA which was the indicator of impaired assets of the banking system does not reveal the whole truth. The Gross NPA as a percentage of gross advances shows a small increase. However, when we look at the restructured standard advances as a percentage of gross advances, we get a different picture.