Debt Restructuring:

Debt Restructuring, a common practice globally, provides relief to distressed borrowers. The intent here is to support deserving businesses by extending loan tenures, putting interest payments on hold, converting debt into equity, issuing fresh term or working capital loans, waiving off the interest and so on. Restructuring of such loans, which are 100% NPA, helps bring the mark down to 18-20% (generally), further cutting losses for banks. 1. Sector-specific Viability:

a.) Currently, prudential norms dictate that organizations seeking restructuring should provide the action plan to revive themselves in: i. 10 years for infrastructure companies. ii. 7 years for other sectors. b.) As per strict RBI guidelines, these are considered upper limits and are allowed only in extreme cases. 2. Financial Positions: a.) Various ratios to be in specified limits. i. ii. iii. iv. v. 3. Return on Capital Employed Debt Service Coverage Ratios Gap between Internal Rate of Return(IRR) and Cost of Fund Operating and Cash Breakeven Point Loan Life Ratio Jurisdictional Limits:

a. Currently infrastructure projects are given more flexibility with respect to date of commencement of commercial operation and restructuring affords added advantage to this sector. b. 4. The RBI also mandates that the infrastructure project should be implemented only in India. According to the RBIs new prudential guidelines on provisioning for restructured loans, banks will now

have to write off 5% of the value of restructured assets instead of the current 2.75%. The rate was revised to 2.75% in November 2012, and the further hike to 5% means that banks have to provide more capital in the balance-sheet and more provisions in their P&L account, which directly impacts their profitability. This provision will lead to decreased profits in the P & L account, diminished asset sizes, and increase in capital requirement to comply with Basel rules. In India, where 70% of the banking sector is owned by the Government, requirement of extra capital will dry up Government resources in a two-phased manner, (i) Decreased contribution from banks to the Government as part of profit distribution (ii) Increased capital infusion requirement.

NPA:

NPA = Non-Performing Asset

Loans and advances given by the banks to its customers is are an Asset to the bank. Just for the sake of simplicity, we can understand that a loan (an asset for the bank) turns as NPA when the EMI, principal or interest component for the loan is not paid within 90 days from the due date. Thus a Bad Loan is a n asset that ceases to generate any income for the bank . Asset or Loan Classification Norms The assets or loans are classified as:Standard Assets Sub-standard Assets Doubtful Assets Loss Assets Now, in order to ensure that banks are not affected due to defaults, RBI has directed the banks to make provisions or set aside money when an account turns bad. Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the

1. 2. 3. 4.

quarter. A Loss Asset is considered uncollectible and of such little value for the bank in retaining the account on its book and ideally, such loans should be written off. Thus, Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100% of the outstanding should be provided for. Apart from above, there are Guidelines by RBI for provisions under special circumstances. Unsecured exposure is defined as an exposure where the realizable value of the security, as assessed by the bank/approved valuers/RBIs inspecting officers, is not more than 10%, ab -initio, of the outstanding exposure. Exposure includes all funded and non-funded exposures.

Security are tangible security properly discharged to the bank and do not include intangible securities like guarantees, etc. Restructuring of assets Standard Assets upon restructuring > Sub-Standard Assets . Thus, NPA upon restructuring slips into further lower asset classification categories as per above table. Also, an NPA upon restructuring can also be up-graded to the standard category after observation of satisfactory performance during the specified period i.e. on repayment of outstanding amount by th e borrower. Provisioning Coverage Ratio (PCR): The ratio of provisioning to gross non-performing assets Indicates the extent of funds a bank has kept aside to cover loan losses. Related News: PSBs profits would have been wiped out were they asked to maintain 70% PCR As per RBI guidelines, NPA is defined as under: Non performing asset (NPA) is a loan or an advance where; interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, the account remainsout of order in respect of an Overdraft/Cash Credit (OD/CC), the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, the instalment of principal or interest there on remains overdue for two crop seasons for short duration crops, the instalment of principal or interest there on remains overdue for one crop season for long duration crops, the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitization dated February 1, 2006. in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. Net NPA = Gross NPA (Balance in Interest Suspense account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in suspense account + Total provisions held).

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7.

Difference Between Bank and NBFC: NBFCs lend and make investments and hence their activities are akin to that of banks. However there are a few differences as given below: NBFC cannot accept demand deposits; NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself NBFC cannot issue Demand Drafts like banks Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks. While banks are incorporated under banking companies act, NBFC is incorporated under company act of 1956

Other features of NBFCs are The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand. The deposits with NBFCs are not insured. The repayment of deposits by NBFCs is not guaranteed by RBI.

CAMELS Rating system: C A M E L S Capital Adequacy Asset Quality Management Capability Earning Potential Liquidity Systems

Heads of a banks balance sheet:

Banks Balance Sheet CAPITAL AND LIABILITIES: Capital Reserve and Surplus Deposit Borrowings Other Liabilities and Provision Total ASSETS Cash an balance with RBI balance with banks, Money at call and short Notice Investments Advances Fixed assets Other Assets Total Contingent Liability

PnL of a bank
Income Interest Earned Other Income Expenditure Interest Expanded Operating expenses Provision and contingencies Profit Net Profit