Banks suggest for restructuring loan out standings for small-loan borrowers

The Reserve Bank of India (RBI) has received suggestions from several banks regarding lower provisions on restructuring loan out standings with small-ticket borrowers. Earlier the apex bank had directed the banks to make a provision of 5% on all restructured loans with an out standing due of Rs 1 crore or less.

In an interview given to the ET senior bankers said that as a large number of restructured accounts are below Rs 1 crore, a 5% provisioning will damage the profits. According to some banks the provisioning should be reduced to 2%.

For reorganized accounts with outstanding dues of over Rs 1 crore, banks will require to calculate the net present value in order to arrive at the provisioning requirement. For instance if a borrower has to make a higher net payment to the bank post restructuring (than what it would have had to pay if the loan was not restructured) no provision is required.

But if the net payment to the bank post restructuring is less, the bank has to formulate a provision based on the loss it suffers on the account.

Indian Overseas Bank executive director G Narayanan pointed out, "On one hand, RBI allows restructuring of loans to revive the economy and on the other hand, steep provisioning norm pinches the profit and loss of banks".

Union Bank of India executive director TY Prabhu explained, "For the banking sector, a bulk of accounts, which would be restructured, belongs to the less-than Rs 1 crore categories. But that does not necessarily mean that the economic loss incurred by banks in restructuring these loans is as steep as 5%. There is a case for lowering the provision".

On the other hand RBI has given banks the choice to either calculate the provision on each account of Rs 1 crore or make a provision on the portfolio, which comprise loans of less than Rs 1 crore. But banks prefer making a flat provision on the portfolio as calculating the provisioning amount on each account is a tiresome process.

According to sources the decision to make a 5% flat provision was taken on an RBI study, which depicted losses suffered by banks, while as per past data are about 5%. In August ’08 RBI had taken a decision to fix a 5% provision.

As per circular issued by RBI: "If due to lack of expertise/appropriate infrastructure, a bank finds it difficult to ensure computation of diminution in the fair value of advances extended by small/rural branches, as an alternative to the methodology prescribed above for computing the amount of diminution in the fair value, banks will have the option of notionally computing the amount of diminution in the fair value and providing therefore, at 5% of the total exposure, in respect of all restructured accounts where the total dues to bank(s) are less than Rs 1 crore till the financial year ending March 2011. The position would be reviewed thereafter."