Restructuring Project Loan

Entrepreneurs who had availed of project loan from various banks sometimes face occasions when the completion of projects is delayed for legal and other extraneous reasons like delays in Government approvals etc. All these factors, which are beyond the control of the promoters, may lead to delay in project implementation and involve restructuring / reschedulement of loans by banks.

Basics

  • All standard accounts on restructuring will slip into sub-standard.
  • NPA upon restructuring will continue with the same status and slip into next stages on passage of time.
  • No reschedulement / restructuring/ renegotiation with retrospective effect.
  • Financial viability to be established and there should be a reasonable certainty of repayment from the borrower, as per the terms of restructuring package.
  • Special regulatory treatment for restructured accounts withdrawn from 01- 04- 2015.

Classification after restructuring

  • Restructured accounts can be upgraded only if principal and interest on all facilities in the account are serviced as per terms of payment during the specified period*.
  • In case satisfactory performance after the specified period is not evidenced  the  asset  classification  of  the  restructured  account  would  be governed as per the applicable prudential norms with reference to the pre- restructuring payment schedule.

*Specified period

A period of one year from the commencement of the first payment of interest or principal, whichever is later, on the credit facility with longest period of moratorium under the terms of restructuring package.

Satisfactory Performance

Non-Agricultural Cash Credit Accounts

Account should not be out of order anytime during the specified period, for duration of more than 90 days. In addition, there should not be any over dues at the end of the specified period.

 Non-Agricultural Term Loan Accounts

No payment should remain overdue for a period of more than 90 days.In addition there should not be any over dues at the end of the specified period.

Agriculture Accounts

In the case of agricultural accounts, at the end of the specified period the account should be regular.

 Additional Finance

  • Any additional finance may be treated as ‘standard asset’ during the Specified period under the approved restructuring package.
  • Where the pre-restructured facilities were classified as ‘sub- standard’ and ‘doubtful’, interest income on the additional finance should be recognized only on cash basis.
  • If the restructured asset does not qualify for up gradation at the end of the specified period, the additional finance shall be placed in the same asset classification category as the restructured debt.

Provision on restructured standard advances

  • Restructured accounts classified as standard advances will attract a higher provision @ 5% in the first two years from the date of restructuring plus moratorium
  • Restructured accounts classified as non-performing advances, when upgraded to standard category will attract a higher provision @5% in the first year from the date of up gradation.

Provision for diminution in the fair value of restructured advances

  • Erosion in the fair value of the advance is the difference between the fair value of the loan before and after restructuring.
  • Fair value of the loan before restructuring is the PV of cash flows representing the interest at the actual rate charged on the advance before restructuring and the principal, discounted at the actual rate charged before
  • Fair value of the loan after restructuring is the PV of cash flows representing the interest at the current rate charged on the advance on restructuring and the principal, discounted at the actual rate charged before restructuring. 

Provision for diminution in the fair value of restructured advances

  • In case of loans attracting different interest rates weighted average interest rate has to be applied as discount rate.
  • Such provision should be held in addition to the normal provisions recommended elsewhere and in an account distinct from that for normal provisions.
  • Provision @ 5% of the total exposure, in respect of all restructured accounts where the total dues to bank(s) are less than rupees one
  • Normal provisions plus provisions in lieu of diminution in the fair value of the advance are capped at 100% of the outstanding debt

Conversion of Unpaid Interest into FITL, Debt or Equity

  • The unrealized income represented by FITL / Debt or equity instrument should have a corresponding credit in an account styled as “Sundry Liabilities Account (Interest Capitalization).

Projects under implementation

 (MASTER CIRCULAR 01/07/2015)

  • Project loan means any term loan extended for the purpose of setting up an economic venture.
  • Infrastructure sector is as defined in the extant harmonized master list if infrastructure of RBI.
  • ‘Date of Completion’ and the ‘Date of Commencement of Commercial Operations’ (DCCO), of the project should be clearly spelt out at the time of financial closure of the project.
  • These should also be documented in the appraisal note by the bank during sanction of the loan.

Deferment of DCCO

  • Deferment of DCCO and consequential shift in repayment schedule for  equal or shorter duration (including start and end date of revised repayment schedule) will not be treated as restructuring provided that:
  • Revised DCCO fall within a period of 2 years and 1 year from the original DCCO  for infra and non infra projects (including CRE) respectively
  • All other terms and conditions remain unchanged.

Revision of DCCO beyond limits mentioned earlier

  • Banks can restructure the loans beyond the time limit and retain standard Category provided fresh DCCO is fixed as mentioned below:
  • Infra projects involving court cases – another 2 years (total extension – 4 years)
  • Infra projects – delay beyond the control of promoters – another 1 year  (Total extension – 3 years)
  • Non Infra projects – another 1 year (total extension – 2 years)
  • This benefit is not available for
  • Before commencement of operation, account may also be classified as NPA based on record of recovery.

The above dispensation is subject to the following:

  • Application for restructuring should be received before expiry of the period mentioned as above and the account is standard as per record of
  • In case of moratorium of interest, banks should not book interest on accrual basis beyond 2 years/ 1 year from the date of original DCCO in case of infra and non-infra projects respectively.
  • Banks should maintain additional provision of 5% from the date of restructuring till the date of revised DCCO or 2 years from the date of restructuring whichever is later.
  • This is in addition to the provision required for diminution in fair value as long as the asset remains as standard asset.

Change of ownership

  • Change of ownership to happen within the 2 or 4 years/ 2 or 3 years for infra/ non-infra projects respectively. further extension of 2 years can be given without any change in asset
  • Consequently, bank can extend the repayment schedule by an equal or shorter duration.
  • Bank should establish that the delay is due to the inadequacy of the present promoters and with the change of ownership there is a high probability of commencement of the project within the extended
  • New promoter should have sufficient expertise in the
  • New promoter should hold minimum 51%. In case of FDI restrictions at least 26% or applicable limit whichever is
  • Viability of the project to be
  • Intra-group business restructuring/ mergers/ acquisitions and/or takeover/acquisition of the project by other entities/subsidiaries/associates etc. (domestic as well as overseas), belonging to the existing promoter/promoter group will not qualify for this facility.
  • The banks should clearly establish that the acquirer does not belong to the existing promoter group;
  • Asset classification on the reference date will continue during the extended
  • Reference date will be the date of execution of the preliminary binding agreement provided the takeover happens within 90 days from the date of execution of the preliminary binding agreement.
  • During the intervening period usual asset classification norms will apply.
  • If takeover does not happen within 90 days, then reference date will be the effective date of takeover as per law governing such take over.
  • New owners should demonstrate their commitment by bringing in substantial portion of additional monies required to complete the project within the extended time period.
  • Revised Repayment schedule should not extend beyond 85% of the economic life of the project.

Multiple revision

  •  Multiple revisions of the DCCO and consequential shift in repayment schedule for equal or shorter duration (including the start date and end date of revised repayment schedule) will be treated as a single event of restructuring provided that the revised DCCO is fixed within the respective time limits stipulated (2 years and one year as the case may be) and all other terms and conditions of the loan remained unchanged.

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