New guidelines: Getting a grip on restructured loans

By restructuring distressed accounts instead of classifying them as non-performing assets (NPAs), banks skirt around the requirement to provide for NPAs by setting aside a specific portion of their capital to make up for losses that could arise from a potential default. However, the rules of the game changed significantly with the issuance by the Reserve Bank of India (RBI) of a circular dated 30 May, which introduced several changes to the prudential guidelines on restructuring of advances by banks and other financial institutions.

The revisions in the circular were based on recommendations by a working group headed by B Mahapatra, an executive director of the RBI, which had been tasked with reviewing the restructuring framework. The updated Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances, issued on 1 July, includes the recommendations of the working group that have been accepted by the RBI.

Classification as NPAs

Pursuant to the circular of 30 May, with certain exceptions, all loans that are restructured after 1 April 2015 are to be classified as substandard accounts or NPAs. One such exception is for loans to infrastructure and non-infrastructure projects, where a change in the date of commencement of commercial operations will not result in the loans being classified as restructured accounts if the revised commencement date is within two years of the original commencement date for infrastructure projects, and within one year of the original commencement date for non-infrastructure projects.

Sawant Singh is a partner, Aditya Bhargava is a senior associate, and Gunmeher Juneja is an associate at the Mumbai office of Phoenix Legal.