RBI norms for corporate debt recasts must not stifle enterprise

The Reserve Bank of India (RBI) has tightened the prudential guidelines for corporate debt recasts. This is welcome. So, banks have to set aside more money to cover restructured assets. However, higher provisioning — 5% in 2016 from 2.75% — will be phased in. Also, only loans restructured after 2015 will be called non-performing assets. This is pragmatic, given that banks may need to infuse more capital to meet these new norms that are on par with developed market standards. Regulatory forbearance on asset classification and provisioning on restructured loans is a huge problem, especially for state-owned banks, that are often arm-twisted by promoters who have clout with the political class. So, the RBI’s move to dispense with it, as recommended by the Mahapatra panel, after two years makes sense.

What is not welcome is the norm that promoters should furnish personal guarantees for a loan to be recast. This militates against the principle of limited liability: shareholder liability is limited to what they have invested by way of fullypaid-up shares. But it is fair to ask the promoter to bring in additional funds as a condition for restructuring the loan.

However, the RBI says that stipulating a personal guarantee will ensure promoters “skin in the game” or commitment to the restructuring package. True, it is concerned over the surge in corporate debt recasts to over Rs 2.29 lakh crore as of March 2013. Non-performing assets too have grown dramatically due to a host of factors: aggressive lending during the time of easy money, reversal in interest rates and the economic slowdown. But bankers cannot just do book-keeping. They should have the ability to assess risks and lend only to viable projects. Speedy procedures must also be in place to foreclose sticky loans. The point is not to stifle enterprise.