Finance Ministry asks banks to have independent corporate debt restructuring oversight panel

To restrict the use of loan restructuring mechanism only to deserving cases, the Finance Ministry on Thursday asked bankers to have an independent oversight committee that will vet the corporate debt restructuring (CDR) applications.

Financial Services Secretary Rajiv Takru asked banks to have the committee consisting of an expert from the legal field, investigative agencies and a finance professional, to make sure that there will not be any scope for allegations.

"An independent oversight mechanism which will not have any government representative or any serving banker, but some experts who can scrutinise from the correctness point of view whether the case referred is genuine," Mr Takru told reporters on the sidelines of the Skoch summit in Mumbai.

The proposal comes amidst allegations of banks using CDR mechanism - under which the repayment tenor of a loan is delayed - to take care of a borrower's temporary needs in times of stress. CDR cases have more than doubled in the past fiscal and are set to increase further this fiscal year.

According to the CDR cell, as on March 31, 2013, loans worth Rs 2,29,013 crore, or 401 companies' loans, were restructured, which is more than double the amount from FY12.

Last week, the RBI had increased provisioning for the recast loans massively and also made loan recasts tougher by increasing promoters' contribution.

Under the new rules, from June 1, banks must set aside provisioning for 5 per cent of the value of a loan that is newly restructured, from 2 per cent previously.

Under the newly revised norms, loans classified as sub-standard would attract a provision of 15 per cent, against the current 10 per cent. For unsecured loans classified as sub-standard assets, an additional 10 per cent provision would have to be made over the current 15 per cent.

Thus, total provisioning for sub-standard unsecured loans would now be 25 per cent, against 20 per cent earlier.

Mr Takru cited a recent case of a corporate conniving with lenders to get its loans restructured and immediately approaching the Board for Industrial and Financial Reconstruction in two months which froze the repayment, so the promoter got away scot-free with the money.

Going to the CDR committee will be non-mandatory for a bank and the committee will act as a pure advisory body, helping the bank vet a particular case, he said.

To be impartial, the officers in the committee should be hired by the Indian Banks Association itself, Mr Takru said, adding the government has some names in mind.

Additionally, on the gross NPAs, which have declined to 3.5 per cent as of March from 3.9 per cent at the end of the preceding quarter, Mr Takru asked banks not to show any flexibility.

In case of provisions of the SARFESI Act being used, the bank should issue auction notices of the asset as soon as possible and dispose of the asset. In case they are not able to get the reserve price, they should take over the asset and place it in their books, to be sold at a later date once the market revives, he said.

He also said while lending, banks should make sure that they have a collateral at least of the equal value as the loan amount, in order to not getting hit by NPAs in the future if the account turns bad.

He also asked banks to submit the reports on agri debt waiver by June 30, but added that they have not found any substantial violations in agri debt waiver cases.