RBI framework for Revitalising Distressed Assets

RBI released its framework of Revitalising Distressed Assets on January 30, 2014. The Key points are

Firstly, banks must categorise borrowers not paying interest on loans for one month into an SMA 1 or special mention account 1. Loans with interest unpaid for two months must be put in SMA 2. And all loans of over Rs 500 million must be reported to RBI's central repository of information on large credits.

Once, one bank puts a loan in the SMA 2 box, all the lenders to that borrower should form a joint lender forum led by the bank with the largest exposure. The forum must first try to rectify the stress by asking promoters to put in money, sell off non-core assets or get another equity partner.

However, where the lenders forum finds out that rectifying won’t work, they may restructure the loan taking appropriate personal guarantees and collateral. If the forum finds that restructuring won’t work, it may resort to recovering what is left of the asset. The forum has only 30 days to arrive at its solution. For loans above Rs 5.00 billion, the forum must seek advice from an independent evaluation committee to ensure fair restructuring. Loans under restructuring will attract lower provisioning of 5 percent. But if lenders fail to resolve SMA 2 loans early, they have to provide more; 25 percent in the first year, instead of 15 percent currently.

Secondly, RBI allowed banks to refinance existing infrastructure project loans through take-out financing agreements with any financial institution. As per circular even if the revised repayment period is longer than the residual repayment period in the earlier bank's books, the account will not be considered restructured, as long as a proper due diligence has been done by the refinancing bank or institution. 

This framework will be fully effective from April 01, 2014

Average DSCR

How to calculate average DSCR(Debt Service coverage ratio)

There are two ways to calculate ADSCR

1.   Take average of each year DSCR (Cash flow available for Debt servicing(PAT+ Depreciation + Interest + Deferred Tax + Lease Rental income)/ (Interest payment in year + Principal repayment in the year)
2. Divide the total Cash flow available for Debt servicing over the life of the loan by sum  total Interest payment and Total Principal repayment)

The first method give equal importance to each period but second method treats each element by the relative importance of the sum of principal and interest

Both method with give same result if denominator is same for all year i.e. / (Interest payment in year + Principal repayment in the year) but result will be different in case of differential repayment

So it is all preferable to calculate ADSCR using second method as

1. It does not treats all period as equally important
2. It does not cover the distortions due to differential repayment
3. It is more accurate representation of average