RBI lays down guidelines for restructured loans
11 Apr 2009
In a much-needed clarification, the Reserve Bank of India has prescribed a uniform formula for computing the diminution in fair value of restructured loans. Diminution is the pared down value of loans that have come for restructuring.
The central bank has not only modified the formula for computing diminution in the fair value of restructured advances but also directed banks to make disclosures in their annual balance sheets for 2008-2009 on the amount and number of accounts in respect of which applications for restructuring are under process, but for which the packages have not yet been approved.
The erosion in the fair value, according to the RBI, should be computed as the difference between the fair value of the loan 'before' and 'after' restructuring. Further, banks will have to make provision for the difference.
The RBI is of the view that the formula may be modified in such a way that the changes in fair value of the loan attributed to the changes in market interest rates are not taken into account while computing the diminution.
The Reserve Bank of India on Thursday postponed the implementation of rule that bars banks from deducting floating provision (made for non-performing assets) from the Gross NPAs for the financial year 2009-10.
Last month, the RBI had told banks to consider floating provisions as part of tier capital II instead of deducting them to arrive at net NPA position for the financial year ended March 2009.
The guidelines on restructuring of advances, the RBI said, are aimed at providing banks and borrowers an opportunity to preserve the economic value of the units and should not be looked at as a means to 'evergreen' the advances. Banks typically restructure advances by reducing the rate of interest and/or re-scheduling the repayment of principal amount.
