Uniform Debt Restructuring Norms Sought for Real Estate
In a recent meeting with RBI Governor D Subbarao, CEOs of prominent banks appealed to the regulator to establish uniform norms for debt restructuring specific to the real estate sector. The current framework necessitates the classification of restructured loans in this sector as non-performing assets (NPAs), unlike other sectors such as steel, textile, or cement, where a one-time restructuring does not result in NPA classification.
The Challenge with Current Norms
Presently, the moment a real estate, capital market, or personal loan is restructured, banks must classify it as a bad loan. This stance has led to a conundrum for lenders, as numerous real estate companies, facing liquidity crunches, have sought loan rollovers. Banks are hesitant to provide additional credit lines or reschedule loans, fearing an increase in their NPA pool.
The Purpose of Loan Restructuring
Loan restructuring enables banks to avoid treating an account as an NPA, thereby maintaining a lower NPA ratio. This practice is beneficial for banks, as once an account is deemed an NPA, provisions must be made, affecting the bank's bottom line.
The Real Estate Sector's Plight
If a real estate company fails to repay a loan on time, the bank must either accept it as an NPA and restructure the loan or pursue legal action. Some banks have begun restructuring real estate loans, while others seek methods to reschedule without categorizing them as NPAs.
A Broader Appeal for Manufacturing Sector
Concurrently, banks have urged the RBI to relax norms for restructuring loans to manufacturing companies. Currently, a first-time restructuring of a performing loan in this sector can be treated as a standard asset. However, subsequent restructurings mandate classification as sub-standard. Banks argue that, given the economic slowdown and global turmoil, a second chance to restructure while maintaining a standard asset classification is warranted.