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IIBF | MSME | RESTRUCTURING OF SHORT-TERM LOANS

IIBF | MSME | RESTRUCTURING OF SHORT-TERM LOANS

RESTRUCTURING OR REHABILITATION

  • The process of restructuring might involve:
  • Re-phasing the repayment schedule to be adjusted for interest as well as installments. 
  • Interest charged on these accounts might be waived or given concession. 
  • Providing funding for the un-serviced interest in case of working capital or term loan facilities. 
  • The margin required for the fund and non-fund limits might be reduced. 
  • Realignment of limits might be allowed from presale to post-sale and vice versa. 
  • Credit facilities might be reassessed.

Restructuring of Short-Terms Loans: 

In general, restructuring involves modification of securities or advances’ terms such as modification in the repayment period, repayable amount, interest rate or installment amount, etc. 

Considering the above definition, a short-term loan that has been rolled over will be considered restructured. 

But RBI has given instructions for the rollover of short-term loans, those cases for not being considered which have been rolled over after pre-sanction assessment including where it has been rolled over as per the borrowers’ actual requirement and when there’s been no concession because of the weakness of the borrower. 

But if the above-mentioned restructuring husband on for > 2 times then from the 3rd rollover, it will be considered as a restructured account. 

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TREATMENT OF PROVISION

  1. Any reduction in the interest rate or any rescheduling in the principal amount repayment, when done as a part of the restructuring, will reduce the fair value of the advance.

This reduction in value amounts to lose for the bank and therefore should be debited to the profit and loss account. 

This provision should be maintained in addition to the existing provisioning norms (distinct from normal provisions). 

  1. Fair value erosion of any advance should be calculated by taking the difference in the fair value of the loan amount before-and-after restructuring

Fair value (before restructuring) is the present value of cash flows discounted at bi interest that has been charged only in advance while the principal amount will be discounted at the Bank’s BPLR rate on the restructuring date. 

Fair value (after restructuring) is the present value of cash flows of interest in advance and principal amount at the Bank’s BPLR rate on the restructuring date. 

The BPLR rates may also include appropriate term and credit risk premium as well on the restructuring date. 

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  1. The reduction in the fair value of any working capital facility will be calculated in the same way as mentioned in point 1 subject to the condition that the principal amount would be the higher of outstanding amount are the sanctioned limit and the tenure of advance – 1 year. 

The term premium would be added to the discount rate as if it is applicable for 1 year. 

The fair value of components of loans i.e working capital, term loan, funded interest term loan will be calculated as per the actual cash flows discounted at the rate applicable for the maturity of the respective loan components. 

 

  1. In cases where any security is taken because of a reduction in the fair value of advance, the provision will be valued at Rs.1/- till the maturity to ensure that economic sacrifices’ any charging off effect does not get nullified. 

 

  1. Fair values of advances should be reviewed on each balance sheet date till the repayment obligations and the outstanding amount has been fully repaid. This will ensure that any changes that occur due to the changes in BPLR/ term premium/ borrowers credit category would also be provided. 

On review, if there is any shortfall, it should be provided for and if there is any excess, then it should be reversed.

 

  1. The calculation of any reduction in fair value could be difficult because of the lack of expertise or appropriate infrastructure. Due to this reason, RBI has allowed notional computation of reduction in fair value in cases where the dues are < Rs. 1 crore. 

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  1. The total provisions that can be made against an account cannot exceed 100% of the debt amount outstanding. This includes all the provisions whether normal or provision for any reduction in fair value). 

 

  1. Provisions created on the restructured amounts can be classified as standard advances as per the RBI norms. 

 

  1. Whenever any account is reclassified or upgraded to the standard account, the amount of provision that has been created when it was an NPA may be reversed.

 

PRUDENTIAL NORMS FOR CONVERSION OF PRINCIPAL INTO DEBT/EQUITY

  1. 1. As a part of the restructuring process, a part of the principal amount that is outstanding can be converted into equity or debt instruments.

This conversion is only allowed in cases of listed companies as a last resort. But the conversion is subject to 10% of the maximum of the debt that has been restructured. 

The converted debt or equity instrument will be classified as of what restructured advance has been classified. 

 

  1. The converted instruments should be held under AFS and should be valued using usual valuation norms

Equity (when quoted) should be valued at market value and when equity is not quoted, then it should be valued at breakup value based on the company’s latest financial statements. 

If the latest financial statements are not available, then the equity share should be valued at Rs.1.00 

When equity shares (if quoted) have been classified as non-performing assets, they should be valued at market price & otherwise, at Rs.1.00 

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  1. When restructured accounts are classified as standard, any income that has been generated from these should be recognized on an accrual basis

When restructured accounts are classified as Non-Performing Assets, and income generated on them should be recognized on a cash basis.

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