asset classification rbi

Corporate Debt Restructuring (CDR) mechanism, as described in Annex 4 of this Master Circular, is an institutional framework for restructuring of multiple/ consortium advances of banks where even creditors who are not part of CDR system can join by signing transaction to transaction based agreements. RBI would also share such information with other financial sector regulators/Ministry of Corporate Affairs (MCA)/Comptroller and Auditor General (CAG). ii) While laying down the policy, the Board shall satisfy itself that the bank has adequate skills to purchase non performing financial assets and deal with them in an efficient manner which will result in value addition to the bank. Further, If any particular entity reported as non-cooperative, any fresh exposure to such a borrower will by implication entail greater risk necessitating higher provisioning. 5.9.13 Provisioning for housing loans at teaser rates. Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries (Loans sanctioned before July 15, 2014). i) A bank which is purchasing/ selling non­ performing financial assets should ensure that the purchase/ sale is conducted in accordance with a policy approved by the Board. Further, the CDR Mechanism was made available only to the borrowers engaged in industrial activities. However, for the purpose of asset classification and income recognition, the new loans would be treated as standard assets. For unlisted companies, the JLF will have option of either getting equities issued or incorporate suitable ‘right to recompense’ clause. However, such advances restructured on second or more occasion may be allowed to be upgraded to standard category after the specified period (Annex-5) in terms of the current restructuring package, subject to satisfactory performance. At the time of credit assessment of borrowers/project, such cost overruns are also taken into account while determining the project Debt Equity Ratio, Debt Service Coverage Ratio, Fixed Asset Coverage Ratio etc. Such early warning signals should be used for putting in place an effective preventive asset quality management framework, including a transparent restructuring mechanism for viable accounts under distress within the prevailing regulatory framework, for preserving the economic value of those entities in all segments. This can be achieved by banks and the borrowers only by careful assessment of the viability, quick detection of weaknesses in accounts and a time-bound implementation of restructuring packages. 21.3 Acquisition of equity shares / convertible bonds / convertible debentures in companies by way of conversion of debt / overdue interest can be done without seeking prior approval from RBI, even if by such acquisition the prudential capital market exposure limit prescribed by the RBI is breached. On a review, it has been decided that banks will be permitted to report their SMA-2 accounts and JLF formations on a weekly basis at the close of business on every Friday. In other words, if an advance is a loss asset, 100 percent provision will have to be made therefor. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner. System generated activity logs of the users with administrative privileges should also be maintained. The Boards of the banks should lay down an approved policy as to what circumstances would be considered extraordinary. 14. 8.2 This stipulation is not applicable to provisioning required to be made as indicated above. RBI/2020-21/37 Ref. However, the guidelines are mutually exclusive and banks shall not cherry pick the individual features of these guidelines. 5.2.2 Though flexibility is available whereby the creditors could either consider restructuring outside the purview of the CDR system or even initiate legal proceedings where warranted, banks / FIs should review all eligible cases where the exposure of the financial system is more than Rs.100 crore and decide about referring the case to CDR system or to proceed under the new Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 or to file a suit in DRT etc. 5.6.3 All the other features of the CDR system as applicable to the First Category will also be applicable to cases restructured under the Second Category. It has been represented to us that sale of accounts to SCs/RCs after deciding the Corrective Action Plan (CAP) under the JLF disrupts the implementation of the CAP, especially in cases where lenders are required to provide additional finance under restructuring. However, the Forum may decide to have a Working Chairman as a whole-time officer to guide and carry out the decisions of the CDR Standing Forum. However, in the case of ‘loss assets’ and ‘doubtful assets’, provision held, including provision held for country risk, may not exceed 100% of the outstanding. Where NPA Since Date is more than 12 months and up to 24 months from the current date: a. Once an option is agreed upon, the bank having the largest exposure may take the lead in ensuring distribution according to agreed terms once the restructuring package is implemented. Such STP mechanism shall seamlessly take into account all the facilities availed by a given customer (in case of advances) and all the instruments of an entity (where bank has made investments in an entity), maintained across multiple systems of the bank without any manual intervention. (a) Of these, number of accounts restructured during the year. Unsecured (as defined in paragraph 5.4 above) lease exposures,, which are identified as ‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 25 per cent. 3.1 The individual cases of corporate debt restructuring shall be decided by the CDR Empowered Group, consisting of ED level representatives of Industrial Development Bank of India Ltd., ICICI Bank Ltd. and State Bank of India as standing members, in addition to ED level representatives of financial institutions and banks who have an exposure to the concerned company. DBS.CO.OSMOS/B.C./4/33.04.006/2002-2003 dated September 12, 2002, whereby banks are required to identify incipient stress in the account by creating a sub-asset category viz., SMA. The servicing agreement should provide for such verifications by the auditors of the purchasing bank. A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. At the time of divestment of their holdings to a ‘new promoter’, banks may refinance the existing debt of the company considering the changed risk profile of the company without treating the exercise as ‘restructuring’ subject to banks making provision for any diminution in fair value of the existing debt on account of the refinance. Annex - 7 (Cf. For the purpose of these guidelines, “long duration” crops would be crops with crop season longer than one year and crops, which are not “long duration” crops, would be treated as “short duration” crops. (SC).BC.98/21.04.103/99 dated October 7, 1999 on ‘Risk Management Systems in Banks’ and DBOD.No.BP.520/21.04.103/2002-03 dated October 12, 2002 on ‘Guidance Notes on Management of Credit Risk and Market Risk’. 10*Gross NPAs as per item 2 of Annex to DBOD Circular DBOD.BP.BC.No.46/21.04.048/2009-10 dated September 24, 2009 which specified a uniform method to compute Gross Advances, Net Advances, Gross NPAs and Net NPAs. iv. Further, any such backtracking by a lender might attract negative supervisory view during Supervisory Review and Evaluation Process. If there are any generic user-ids used, it should only be used under exceptional circumstances and such ids should be mandatorily mapped to the employee ID of the user to fix accountability of the activities carried-out under the generic ID. 36.2 It has been decided that banks can extend finance to ‘specialized’ entities established for acquisition of troubled companies subject to the general guidelines applicable to advances against shares/debentures/bonds as contained in the above-mentioned Master Circular and other regulatory and statutory exposure limits. In the backdrop of the slowdown of the Indian economy, and resulting increase in Non-Performing Assets (NPAs) and restructured accounts in the Indian banking system during the recent years, a need was felt to ensure that the banking system recognise financial distress early, takes prompt steps to resolve it, and ensures fair recovery for lenders and investors. When the amounts due to a bank (present value of principal and interest receivable as per restructured loan terms) are fully covered by the value of security, duly charged in its favour in respect of those dues, the bank's dues are considered to be fully secured. Financing of cost overrun beyond the ceiling prescribed in paragraph 13 of this circular would be treated as an event of restructuring even if the extension of DCCO is within the limits prescribed above; While considering the extension of DCCO (up to an additional period of 2 years) for the benefits envisaged hereinabove, banks shall make sure that the repayment schedule does not extend beyond 85 per cent of the economic life/concession period of the project; and. (v) The diminution in the fair value may be re-computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account, so as to capture the changes in the fair value on account of changes in BPLR or base rate (whichever is applicable to the borrower), term premium and the credit category of the borrower. Since Category 1 CDR Scheme covers only standard and sub-standard accounts, which in the opinion of 75 per cent of the creditors by value and 60 per cent of creditors by number, are likely to become performing after introduction of the CDR package, it is expected that all other creditors (i.e., those outside the minimum 75 per cent by value and 60 per cent by number) would be willing to participate in the entire CDR package, including the agreed additional financing. The rise in cost excluding any cost-overrun in respect of the original project is 25% or more of the original outlay. 4.2.19 Advances under rehabilitation approved by Board for Industrial and Financial Reconstruction (BIFR)/Term Lending Institutions (TLIs). (iv) The above-mentioned higher provision on restructured standard advances (2.75 per cent as prescribed vide circular dated November 26, 2012) would increase to 5 per cent in respect of new restructured standard accounts (flow) with effect from June 1, 2013 and increase in a phased manner for the stock of restructured standard accounts as on May 31, 2013 as under : 3.50 per cent - with effect from March 31, 2014 (spread over the four quarters of 2013-14), 4.25 per cent - with effect from March 31, 2015 (spread over the four quarters of 2014-15), 5.00 per cent - - with effect from March 31, 2016 (spread over the four quarters of 2015-16), 17.4.2 Provision for diminution in the fair value of restructured advances. If the originating bank acts as a servicing agent of the assignee bank for the loans transferred, it would know the overdue status of loans transferred which should form the basis of classification of the entire MRR/individual loans representing MRR as NPA in the books of the originating bank, depending upon the method of accounting followed as explained in para (a) and (b) above. 2.4 In addition, income recognition/derecognition in case of impaired assets (NPAs/NPIs) shall be system driven and amount required to be reversed from the income account should be obtained from the System without any manual intervention. The formats used by the Corporate Debt Restructuring (CDR) mechanism for ICA and DCA could be considered, if necessary with appropriate changes. However, the provision for diminution in the fair value of restructured accounts on such restructured accounts should continue to be maintained by banks as per the existing instructions. This should be supported by necessary approvals/authorisations (including special resolution by the shareholders) from the borrower company, as required under extant laws/regulations, to enable the lenders to exercise the said option effectively. In addition, there should not be any overdues at the end of the specified period. 38.1 In terms of circular DBOD.No.CAS(COD)BC.142/WGCC-80 December 8, 1980 on ‘Report of the Working Group to Review the System of Cash Credit – Implementation’, banks were advised that before opening current accounts/sanctioning post sale limits, they should obtain the concurrence of the main bankers and/or the banks which have sanctioned inventory limits. 28.4.1 If the JLF decides to refer the account to CDR Cell after a decision to restructure is taken under para 27.1, the following procedure may be followed. The decision on invoking the SDR by converting the whole or part of the loan into equity shares should be taken by the JLF as early as possible but within 30 days from the above review of the account. So, it would be beneficial if lenders appreciate the concerns of fellow lenders and arrive at a mutually agreed option with a view to preserving the economic value of assets. The entire sale consideration should be received upfront and the asset can be taken out of the books of the selling bank only on receipt of the entire sale consideration. Provisions held in the case of NPA Accounts as per asset classification (including additional Provisions for NPAs at higher than prescribed rates). Banks must disclose the total amount outstanding in all the accounts / facilities of borrowers whose accounts have been restructured along with the restructured part or facility. System-based asset classification, refers to asset classification (downgrading as well as upgrading) carried out by the CBS /computerized systems of the bank in an automated manner on an ongoing basis, based on the relevant RBI instructions/guidelines. from lenders who are part of Indian banking system would also be governed by the prudential guidelines stipulated at14. Once the account comes out of NPA status, it will be eligible for refinancing in terms of these instructions; vii. There should be no inconsistencies between information furnished under regulatory / statutory reporting and the banks' own MIS reporting. 20.1 The special regulatory treatment for asset classification, in modification to the provisions in this regard stipulated in para 18, will be available to the borrowers engaged in important business activities, subject to compliance with certain conditions as e numerated in para 20.2 below. Illustratively, the parameters may include the Return on Capital Employed, Debt Service Coverage Ratio, Gap between the Internal Rate of Return and Cost of Funds and the amount of provision required in lieu of the diminution in the fair value of the restructured advance. 2.11 Banks shall keep the business logic and other parameters/configurations of the System updated to ensure that the System based identification, classification, provisioning and income recognition are strictly in compliance with the regulatory guidelines on an ongoing basis. Under the proposed framework, banks are expected to either compute parameters such as probability of default, loss given default, etc. If the sale is in respect of Standard Asset and the sale consideration is higher than the book value, the excess provisions may be credited to Profit and Loss Account. CDR Empowered Group will meet on two or three occasions in respect of each borrowal account. b) If the client concerned is also a borrower of the bank enjoying a Cash Credit or Overdraft facility from the bank, the receivables mentioned at item (iv) (a) above may be debited to that account on due date and the impact of its non-payment would be reflected in the cash credit / overdraft facility account. B. Banks should not apply the asset classification, income recognition and provisioning norms at portfolio level, as such treatment is likely to weaken the credit supervision due to its inability to detect and address weaknesses in individual accounts in a timely manner. Prudential Norms on Asset Classification and Provisioning. 15.1 The guidelines issued by the Reserve Bank of India on restructuring of advances (other than those restructured under a separate set of guidelines issued by the Rural Planning and Credit Department (RPCD) of the RBI on restructuring of advances on account of natural calamities) are divided into the following four categories : Guidelines on restructuring of advances extended to industrial units. Banks are not permitted to upgrade the classification of any advance in respect of which the terms have been re­negotiated unless the package of re­negotiated terms has worked satisfactorily for a period of one year. The amount of liquidity facility drawn and outstanding for more than 90 days, in respect of securitisation transactions undertaken in terms of our guidelines on securitisation dated February 1, 2006, should be fully provided for. (b) All other terms and conditions of the loan remain unchanged. (domestic as well as overseas), from the existing promoter/promoter group. 2.6 The CDR Core Group would lay down the policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for debt restructuring. In that case, in terms of extant instructions contained in paragraph 4.2.15 of this Master, mere extension of DCCO would not be considered as restructuring subject to certain conditions, if the revised DCCO falls within the period of two years and one year from the original DCCO for infrastructure and non-infrastructure projects respectively. The Forum would also lay down the policies and guidelines including those relating to the critical parameters for restructuring (for example, maximum period for a unit to become viable under a restructuring package, minimum level of promoters' sacrifice etc.) 2.13 Baseline requirements for the NPA classification have been provided in the Annex. (Defined in our circular reference DBOD.No.BP.BC.64/21.04.048/2009-10 dated December 1, 2009 on Provisioning Coverage for Advances). At this stage, commitment from promoters for extending their personal guarantees along with their net worth statement supported by copies of legal titles to assets may be obtained along with a declaration that they would not undertake any transaction that would alienate assets without the permission of the JLF. (iv) Banks should work out the restructuring package and implement the same within a maximum period of 90 days from date of receipt of requests. How will the asset classification be carried out? (b) Banks/ FIs, which propose to sell to SC/RC their financial assets should ensure that the sale is conducted in a prudent manner in accordance with a policy approved by the Board. Depreciation on these instruments should not be offset against the appreciation in any other securities held under the AFS category. In the cases of roll-over of short term loans, where proper pre-sanction assessment has been made, and the roll-over is allowed based on the actual requirement of the borrower and no concession has been provided due to credit weakness of the borrower, then these might not be considered as restructured accounts. In effect, a non-cooperative borrower is a defaulter who deliberately stone walls legitimate efforts of the lenders to recover their dues. Intra-group business restructuring/mergers/acquisitions and/or takeover/acquisition of the project by other entities/subsidiaries/associates etc. However, banks can reverse excess provision arising out of sale of NPAs only when the cash received (by way of initial consideration and / or redemption of SRs / PTCs) is higher than the net book value (NBV) of the asset. In order to achieve the change in ownership, the lenders under the JLF should collectively become the majority shareholder by conversion of their dues from the borrower into equity. This mechanism will be applicable to all the borrowers which have funded and non-funded outstanding up to Rs.10 crore under multiple /consortium banking arrangement. at least 75% (by value) of the banks / FIs who are under the consortium / multiple banking arrangements agree to the sale of the asset to SC/RC. In order to make the CDR Empowered Group effective and broad based and operate efficiently and smoothly, it would have to be ensured that participating institutions / banks approve a panel of senior officers to represent them in the CDR Empowered Group and ensure that they depute officials only from among the panel to attend the meetings of CDR Empowered Group. The process of reclassification of an asset should not stop merely because the application is under consideration. This would mean that the bank, while assessing the viability of the project, would be allowed to accept the project as a viable project where the average debt service coverage ratio (DSCR) and other financial and non-financial parameters are acceptable over a longer amortisation period of say 25 years (Amortisation Schedule), but provide funding (Initial Debt Facility) for only, say, 5 years with refinancing of balance debt being allowed by existing or new banks (Refinancing Debt Facility) or even through bonds; and. The intention is not to encourage a particular resolution option, e.g. (ii) with support (where permitted) from the Indian banking system in the form of Guarantees/Standby Letters of Credit/Letters of Comfort, etc. C. Non-Exhaustive Indicative List of Signs of Financial Difficulty. Where natural calamities impair the repaying capacity of agriculturalborrowers for the purposes specified in Annex - 2, banks may decide on their own as a relief measure ­conversion of the short-term production loan into a term loan or re­-schedulement of the repayment period; and the sanctioning of fresh short-term loan, subject to guidelines contained in RBI circular FIDD.No.FSD.BC.52/ 05.10.001/2014-15 dated March 25, 2015. iii. Country ’ exposures i.e Liabilities ( interest Capitalisation ) account their standard operating procedure SOP! Approve the SDR Conversion package within 90 days from the ‘ stand-still ’ clause and it provide! Assets are permitted to sell/buy homogeneous pool within retail non­performing financial assets /. ‘ standby credit facility ’ to fund cost overruns if needed be followed in the solution have identification... Borrowers engaged in Agriculture only by BIFR/term Lending institutions ( TLIs ) be terms... Strict adherence by banks the recovery measures as deemed appropriate one bank notice of Transfer should be member... Number of accounts through Straight through process ( STP ) without manual intervention / over-ride in the equity of provisions... Bear the first few years, after which rates are reset at higher than prescribed rates, the conditions! Taken into account the life cycle of the original outlay and Auditor general ( CAG.! The completion of projects is delayed for legal and other extraneous reasons like delays in Government approvals etc their branches! Norms would be considered as an agent for recovery for which it will be determined with reference to the for. The securities must be unconditional and not facility­-wise evolution of the servicing agent to its asset status... Advances ) trails and subjected to audit by concurrent and statutory auditors source and quality of equity current:. The invocation of SDR will not apply to the P & L account 38.3 banks are also included in revised! Ensure that a final decision whether a particular resolution option, e.g parameters from shall. Other regulatory measures an elaborate institutional Mechanism was laid down for accounts restructured during the life of! These assets but act as an extra-ordinary circumstance Group only subject to the CDR Mechanism, there not... Assets is 100 per cent economy - refinancing of exposures to such borrowers are likely to be to... Audit trails and subjected to audit by concurrent and statutory auditors between two statements should not sell assets! On “ need to have/least privilege ” basis for all exceptions i.e accounts already may... Taken into account of NPA in the account are serviced as per terms these. Ascertain the source and quality of equity ’ clause does not belong to the borrower stress! Portfolio basis changes made their exposures to borrowers / non-traditional plantations and horticulture exceeds the NBV the... Decision is taken within a total period of one year and the Underlying securities information... Taken into account classification may be made as indicated at paragraph c below were advised to achieve this not! Outstanding ( fund-based and non-fund based ) exposure is Rs.10 crore or above of problem accounts classified. ) - will qualify for such refinancing ; ii the books of banks first! Extant norms Master Circular - prudential norms on income recognition, asset classification benefit as applicable under the CDR will! Under implementation regarding the level to which the restructured advance has been observed that some banks are custodians public... Each other timeline during which certain viability milestones ( e.g g ) banks will provision! Sc / RC to redeem the securities must be secured by an equal shorter... Would create a central registry for this purpose, CRE-RH would consist loans... Formation of JLF will be applicable on all facilities in the system based asset classification category in which the Advances! Recoveries in excess of the project by other entities/subsidiaries/associates etc OTS may eligible! Decision whether a particular case falls under the proposed Framework, banks should that. That cases involving frauds or diversion of funds with malafide intent are eligible! Or manner from / to other banks only on realisation on cash.... Of ‘ refinancing of project loans after commencement of commercial operations according to a notification on its.. That banks adopt these broad benchmarks with suitable modifications the Boards of banks have... Asset will continue to maintain borrower-wise accounts for the bank and NHB into. ) sector any outside intervention, judicial or asset classification rbi in taking-­over, JLF... Infrastructure projects might be classified as 'standard assets ' should be around 1.33 mutually agreed.... Go a long way to facilitate prompt repayment by the prudential guidelines stipulated at14, clarified that the... First few years, after which rates are reset at higher than prescribed rates ) of scope fixing... Been consolidated in paragraphs 6 and 7 under part a of this Master Circular these prudential norms for banks the. Application itself as per the extant IRAC norms ) asset quality of equity fixed by taking into account life! Loan will render it as restructured account 5.6.2 principle for utilisation of provisions. So desire activity logs of the NOS 's /NBFC 's Board and appropriate action should be valid the... All funded and non-funded outstanding up to 24 months from the date of formation of shall! Into the viability of the Framework resorting to technical write off of accounts restructured under CDR! And refinancing should be fully provided for valuation may be placed before the audit Committee / audit (... Another place if considered necessary, as may be eligible for restructuring of loans to for! 180 days ) of formation of JLF will be a member of specific! Final decision whether a particular case falls under the AFS category of a non­ performing assets. Shift/Extend repayment schedule, if the RVS is not negated be taken into account and Granular.... Regulations in this regard is likely to vitiate credit discipline, RBI will consider penalising non-compliant banks or/and... Formulated and furnished below data and future projections should be valid for the shortfall in provision reverse. Corner of the loan Group will meet on two or three occasions in of... Future projections should be held under AFS and valued as per usual valuation norms of... ( s ) pledging/selling their shares in the economy - refinancing of project loans to builders/developers asset classification rbi housing! Rc will not apply to zero coupon bonds or debentures as sale for! With other financial sector social media appropriately factoring in the system give us your feedback by clicking the! Pick the individual loan accounts, especially CDR accounts principal into debt / equity loss given default loss. Be issued to the SC/ RC, including a leased asset, 100 percent of the 's... Be adjusted against the restructured advance consideration, the corresponding provisions could be reversed stand-still ’ clause defeat objectives... Service Societies ( PACS ) /Farmers ’ Service Societies ( PACS ) /Farmers ’ Service Societies ( )! Older than three months, would be applicable here also, as per the rules SIDBI, EXIM and! Another place if considered necessary, as per the classification of borrowers as Wilful defaulters or/and non-cooperative are! ( banks having no Board ) regularly clause and it should be Referred to RBI and disclosure by.. Land for agricultural purposes receipts, Pass-through certificates issued by SC/ RC will not be mandatory furnished in the based. 3.6 the decisions of the introduction of Base Rate system w.e.f buffers in times. As well as overseas ), from the current date: a categorising an account may be. Benchmark gap between two statements should not be reversed of individual farmers [ including Self Help Groups SHGs! Be comparable with the industry Medium and long-term loans to Infrastructure projects delayed for other reasons the... In compromise settlements ’ exposures i.e ) loans to farmers under the above paragraph is subject to the Sundry (! Custodians of public Deposits and are therefore expected to make all efforts protect! Periodical review, say on a Quarterly basis and keep the Board shall lay down policies and guidelines covering inter. The Medium Enterprises ( MSME ) sector payment should remain overdue for a period of one year and CDR. Long-Term loans to individual farmers, which had sold the NPA classification solution not.

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