Conversion of debt into preference shares should be done only as a last resort
A working group set up by the Reserve Bank of India (RBI) has recommended tightening the provisioning norms for banks by increasing the amount of capital to be set aside by them from 2 per cent to 5 per cent of the loan amount in a phased manner over a two-year period, that is, 3.5 per cent in the first year and the balance in the second year.
In cases of new restructuring of standard asset, it has suggested that a provision of 5 per cent should be made with immediate effect.
The RBI released the report of the working group, constituted to review the existing prudential guidelines on restructuring of advances by banks and financial institutions, for comments, which should reach RBI by August 21.
The working group felt that extant asset classification benefits in cases of change of date of commencement of commercial operation (DCCO) of infrastructure project loans could be allowed to continue for some more time in view of the uncertainties involved in obtaining clearances from various authorities and importance of the sector in national growth and development.
“Conversion of debt into preference shares should be done only as a last resort,” it recommended. Also, conversion of debt into equity/preference shares should be restricted to a cap (say 10 per cent of the restructured debt).
Further, conversion of debt into equity should be done only in the case of listed companies.
A higher amount of promoters’ sacrifice in cases of restructuring of large exposures under corporate debt restructuring (CDR) mechanism needed to be considered. Further, the promoters’ contribution should be prescribed at a minimum of 15 per cent of the diminution in fair value of the restructured account or 2 per cent of the restructured debt, whichever was higher, it added.
As stipulating personal guarantee would ensure promoters’ “skin in the game” or commitment to the restructuring package, obtaining the personal guarantee of promoters should be made mandatory in all cases of restructuring, even if the restructuring was necessitated on account of external factors pertaining to the economy and industry. Further, it said, “corporate guarantee should not be considered as a substitute for the promoters’ personal guarantee.”
``The RBI may prescribe the broad benchmarks for the viability parameters based on those used by CDR Cell; and banks may suitably adopt them with appropriate adjustments, if any, for specific sectors,’’ it said.
The working group recommended that, “in times when there is no general downturn in the economy, the viability time span should not be more than five years in non-infrastructure cases and not more than eight years in infrastructure cases’’.