Since 2008, RBI had relaxed norms for restructured loans several times and allowed lower provisioning for select categories of loans. The central bank's well-intentioned regulatory relaxations have prevented a rise of nearly R90,000 crore in the NPAs.
These relaxations include allowing unsecured loans to micro-finance companies to be restructured in 2011, and recently allowing second restructuring of loans on a case-to-case basis. State electricity boards and the aviation sector are two notable examples wherein loans were restructured for a second time, but were not classified as non-performing assets.
Loans are restructured to give borrower more time for repayment, owing to his inability to service the loan due to factors beyond his control such as economic slowdown. As per current norms, any account restructured for second time is required to be classified as a non-performing asset. For instance, SEBs of Uttar Pradesh and Rajasthan with a loan restructuring package of R70,000 crore were second timers, but the special restructuring package approved for SEBs included a special dispensation which allowed banks to waive provisions on these accounts.
The watering down of provisioning norms has limited the hit on banks books to just a sacrifice of interest income as against the potential surge in provisioning in case of these loans getting classified as NPA. The provisioning rise would have wiped out a significant part of public sector banks' profits.
The total approved SEB restructuring package was of R1.9 lakh crore.
For instance, bankers took a hit of 2% on their total loan amount to these SEBs because of the restructuring, which works out to R1,400 crore. Classification of these loans as NPA would have meant a provisioning of R70,000 crore based on 100% provisioning required for NPAs. Bankers defend forbearance saying restructuring package is more comprehensive and beneficial than the first round of restructuring done by individual banks.
The second restructuring was a comprehensive restructuring and certain milestones were set by the government as opposed to earlier restructurings done individually by banks, said CMD of Oriental Bank of Commerce SL Bansal.
Another case where banks were given special dispensation was in the case of Air India's massive debt restructuring of R18,000 crore.
This too was a case of second restructuring and would have added to the NPA burden if not for the forbearance of RBI.
Earlier in 2011, RBI allowed banks to restructure loans given to micro finance companies even if these were unsecured as a special case. Banks are otherwise not allowed to restructure loans that lack collateral. Close to R5,000 crore worth of MFI loans were restructured by banks wherein a moratorium of two years was given.