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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
3M. P. Chitale & Co.CA. Ulhas Chitale
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.
4M. P. Chitale & Co.CA. Ulhas Chitale
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.
5M. P. Chitale & Co.CA. Ulhas Chitale
RBI MS on IRAC Continued… (3/12)
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).
6M. P. Chitale & Co.CA. Ulhas Chitale
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)
7M. P. Chitale & Co.CA. Ulhas Chitale
RBI MS on IRAC Continued… (4/12)
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.
RBI MS on IRAC Continued… (5/12)
8M. P. Chitale & Co.CA. Ulhas Chitale
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.
RBI MS on IRAC Continued… (6/12)
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/-.
RBI MS on IRAC Continued… (7/12)
10M. P. Chitale & Co.CA. Ulhas Chitale
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.
RBI MS on IRAC Continued… (8/12)
11M. P. Chitale & Co.CA. Ulhas Chitale
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
RBI MS on IRAC Continued… (9/12)
12M. P. Chitale & Co.CA. Ulhas Chitale
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
RBI MS on IRAC Continued… (10/12)
13M. P. Chitale & Co.CA. Ulhas Chitale
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
RBI MS on IRAC Continued… (11/12)
14M. P. Chitale & Co.CA. Ulhas Chitale
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.
RBI MS on IRAC Continued… (12/12)
15M. P. Chitale & Co.CA. Ulhas Chitale
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
16M. P. Chitale & Co.CA. Ulhas Chitale
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.
17M. P. Chitale & Co.CA. Ulhas Chitale
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.
18M. P. Chitale & Co.CA. Ulhas Chitale
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.
19M. P. Chitale & Co.CA. Ulhas Chitale
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.
20M. P. Chitale & Co.CA. Ulhas Chitale
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
21M. P. Chitale & Co.CA. Ulhas Chitale
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.
22M. P. Chitale & Co.CA. Ulhas Chitale
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.
Exchange of information - Lending under Consortium / Multiple Banking Continued… (3/7)
23M. P. Chitale & Co.CA. Ulhas Chitale
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
Exchange of information - Lending under Consortium / Multiple Banking Continued… (4/7)
24M. P. Chitale & Co.CA. Ulhas Chitale
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.
Exchange of information - Lending under Consortium / Multiple Banking Continued… (5/7)
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
Exchange of information - Lending under Consortium / Multiple Banking Continued… (6/7)
26M. P. Chitale & Co.CA. Ulhas Chitale
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
Exchange of information - Lending under Consortium / Multiple Banking Continued… (7/7)
27M. P. Chitale & Co.CA. Ulhas Chitale