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Bank Branch Audit

Restructuring / CDR of Advances by Bank

Session by CA. Ulhas Chitale, [email protected]

1

Disclaimers

These are my personal views and can not be construed to be the views of the ICAI, IASB of ICAI, Regional Councils of ICAI or M. P. Chitale & Co., Chartered Accountants

These views do not and shall not be considered as professional advice

2M. P. Chitale & Co.CA. Ulhas Chitale

Session Overview

RBI MS on IRAC norms 1.7.2013 and

Subsequent circulars issued by R. B. I.

from time to time

Corporate Debt Restructuring (CDR) Mechanism

SME Debt Restructuring Mechanism


RBI MS on IRAC Banks cannot reschedule / restructure

negotiate accounts with retrospective effect.

The asset classification would be relevant to decide the asset classification on the basis of date of approval.

No account will be taken up for restructuring by the banks unless the financial viability is established.


RBI MS on IRAC Continued… (2/12)

The restructuring cannot take place unless alteration / changes in original loan agreements are made with the formal consent of the borrower.

The borrowers indulging in frauds will not be eligible for restructuring packages.

Board For Industrial And Financial Reconstruction (BIFR) cases are not eligible for restructuring without approval of BIFR.



The accounts classification can be upgraded only when all the outstanding loan/ facilities in the account perform satisfactorily during the specified period (12 months)

If the borrower fails to abide to restructured terms, the asset classification would be governed by applicable prudential norms with reference to the pre restructuring payment schedule.

However additional finance may be classified under standard assets during the specified (12 months).


Provisioning Norms: The standard restructured assets will attract higher provisions in first 2 years. (RBI has recently notified that over next 3 years the provision will be raised to 5% of the outstanding balance in the phased manner.)

3.50%- with effect from March 31, 2014 (spread over the 4 quarters of 2013-14)

4.25%- with effect from March 31, 2015 (spread over the 4 quarters of 2014-15)

5%- with effect from March 31, 2016 (spread over the 4 quarters of 2015-16)



Provision for diminution in the fair value: Reduction in the rate of interest and/ or re-schedulement of the repayment of principal amount will result in diminution in the fair value of the advance.

This will be economic loss to the bank hence needs to be provided fully by debiting to Profit & Loss account.



The erosion/ loss should be computed as the difference between the fair value of loan before and after restructuring.

The fair value is to be recomputed on each balance sheet date.


CA. Ulhas Chitale M. P. Chitale & Co. 9

Risk- Weights: Restructured housing loans should be restated with an additional risk weight of 25%. – For CRAR purpose

Prudential Norms for Conversion of Principal into Debt/ Equity: The same asset classification will apply to equity as per original loan instrument.

The equity instrument classified as NPA should be valued at Re. 1/-.



Prudential Norms for Conversion of Unpaid Interest into ‘Funded Interest Term Loan’ (FITL), Debt or Equity Instruments:

The unpaid interest should not be recognized as income in Profit & Loss account;

However, the same should be parked in sundry liabilities on liability side.



The restructuring of accounts may not be applicable to the following categories;

Consumer and personal advances;

Advances classified as Capital market exposures;

Advances classified as Commercial real estate exposures



The special regulatory framework will apply to the following;

Incentive for quick implementation of the restructuring package (Within 120 days)

Retention of the asset classification of the restructured account in the pre-restructuring asset classification category



The date of receipt of application will decide IRAC status for other than CDR cases.

The dues should be fully secured.

The unit should become viable within 8 years for infrastructure projects within 15 years

and in other cases within 10 years



Promoter’s sacrifice and additional funds brought by borrower should be a minimum of 20% of banks sacrifice or

2% of the restructured debt, whichever is higher.

The restructured assets would be downgraded with effect from 1st April, 2015.

The restructured assets information should be attached to balance sheet as RBI guidelines.



Income on restructured accounts

Income on restructured accounts should be recognized only on cash basis or income not recognized in the form of interest should be parked in sundry suspense account and should not be credited to Profit & Loss Account


Corporate Debt Restructuring (CDR) Mechanism CDR mechanism will be applicable to;

The borrowers enjoy credit facilities from more than one bank/ FI under multiple banking/ syndication/ consortium system lending.

The total outstanding (fund-based and non-fund based) exposure should be Rs. 10 Croreor above.


Corporate Debt Restructuring (CDR) Mechanism Continued… (2/3)

The financial viability will depend on following;

Return on capital employed (ROCE),

Debt service coverage ratio (DSCR),

Gap between the internal rate of return (IRR) and the Cost of Fund (CoF)

Extent of sacrifice.


Corporate Debt Restructuring (CDR) Mechanism Continued… (3/3)

The CDR will be applicable to standard and sub-standard category.

There is exit option for member banks.

The CDR approved package must incorporate right to recompense clause.


SME Debt Restructuring Mechanism SME Debt restructuring mechanism will be

applicable to all the borrowers which have funded and non-

funded outstanding up to Rs. 10 crores and under multiple/ consortium.

The banks may review the progress in rehabilitation and restructuring of SME accounts on quarterly basis.


Exchange of information - Lending under Consortium / Multiple Banking

Exchange of information - Lending under Consortium Arrangement / Multiple Banking Arrangements

Bank need to strengthen their information back-up about the borrowers enjoying credit facilities from multiple banks


Exchange of information - Lending under Consortium / Multiple Banking Continued… (2/7)

Obtain declaration from the borrowers about the credit facilities already enjoyed by them from other banks.

In the case of existing lenders, all the banks may seek a declaration from their existing borrowers availing sanctioned limits of 5.00 crore and above or

wherever, it is in their knowledge that their borrowers are availing credit facilities from other banks, and introduce a system of exchange of information with other banks as indicated above.


Banks should exchange information about the conduct of the borrowers' accounts with other banks at least at quarterly intervals.

Obtain regular certification by a professional, preferably a Chartered Accountant / Company Secretary / Cost Accountant regarding compliance of various statutory prescriptions that are in vogue.



Make greater use of credit reports available from

1. Credit Information Companies [Credit Information Bureau (India) Limited (CIBIL)

2. M/s Experian Credit Information Company of India Private Ltd.,

3. Equifax Credit Information Services Pvt. Ltd. and



4. High Mark Credit Information Services Pvt. Ltd.]

The banks should incorporate suitable clauses in the loan agreements in future (at the time of next renewal in the case of existing facilities) regarding exchange of credit information so as to address confidentiality issues.


CA. Ulhas Chitale M. P. Chitale & Co. 25

Lead Bank should communicate drawing power to member banks on monthly/quarterly basis

The joint documentation of all banks under consortium should be expedited.

In remaining time, individual bank may obtain their individual document



The Parri passu charge should be registered on assets of the Co. with ROC.

ROC search report should be obtained on yearly basis, at the same time audited Balance Sheet should be obtained

Any stock inspection done by any member bank/ leader should be communicated to fellow members



Thank You

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