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Friday, January 31, 2014

RBI tightens guidelines to deal with loan default; suggests timeline to restructure loans

The Reserve Bank of India on Thursday laid out rules for early detection of loan default and suggested a timeline to restructure loans in a move that will end decades of promoters gaming the system.

Removing promoters who are wilful defaulters, selling off units that dragged a company down before recasting debt, mandatory equity investments by founders and the transfer of promoter holdings to a security trustee until the company turns around are among the final guidelines.

The central bank has also put an end to the infighting among lenders in loans recovery and has stiff penalties if banks and non-banking finance companies work to hide brewing defaults in accounts by suggesting high provisioning norms.

"The general principle of restructuring should be that the shareholders bear the first loss rather than the debt holders," said the RBI's Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders guidelines.

The central bank is right to be worried. Total restructured loans, including those that have been withdrawn and exits from the corporate debt recast programme, shot up 45 per cent to Rs 2.72 lakh crore at the end of September, from Rs 1.87 lakh crore a year ago.

What frightens stakeholders is that the debt structuring process may merely be a delaying tactic for companies and bankers that temporarily allow them to hide loans that have gone irrevocably bad. Whether the new norms will be uniformly applied by banks or not is being doubted.

"Banks have been taking action on promoters, however, selectively particularly on small businesses. Lenders are afraid of taking any repossession action against large promoter as it could lead to loss of business in future," said a senior banker, who did not want to be identified.

Source: Economic Times


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