Worried over rising non-performing assets (NPAs), the Reserve Bank of India on Thursday tightened rules for restructuring of most types of loans in line with global practices.

As per the latest RBI notification, provisioning on the newly restructured account has been raised to 5 per cent from June 1 from 2 per cent now.

However, for the old restructured account it will be done in a phased manner.

The RBI also said that existing “regulatory forbearance” would no longer be available from April 1, 2015.

“...it is clarified that no such incentive would be available on withdrawal of regulatory forbearance on restructuring with effect from April 1, 2015, except in cases of restructuring by change of DCCO (date of commencement of commercial operation) of infrastructure and non-infrastructure project loans as specified in this circular,” the Central Bank said.

As per existing guidelines, an account after restructuring is not classified as NPA. However, as per the new norms, restructured account would be treated as NPA.

“This may be made applicable with immediate effect in cases of new restructuring but in a phased manner during a two-year period for the existing standard restructured accounts,” it added.

As a result, the banks will have to do higher provision which will have negative impact bottom lines.

Banks are also advised that they should correctly capture the reduction in fair value of restructured accounts as it will have a bearing not only on the provisioning required to be made by them but also on the amount of sacrifice required from the promoters, it said. Further, it said, “there should not be any effort on the part of banks to artificially reduce the net present value of cash flows by resorting to any sort of financial engineering.” Banks are also advised to put in place a proper mechanism of checks and balances to ensure accurate calculation of erosion in the fair value of restructured accounts, it added.

The RBI said it has been decided that banks should ensure that the unit taken up for restructuring achieves viability in eight years, if it is engaged in infrastructure activities, and in five years in other cases.

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