INDIA RBI REVIEWS RULES FOR RESTRUCTURING OF ADVANCES BY BANKS

     (The following press release from the RBI's website was received by 
e-mail. The sender verified the statement.) 
All Scheduled Commercial Banks
(excluding RRBs) 
Dear Sir, 
Review of Prudential Guidelines on Restructuring of Advances by Banks and 
Financial Institutions 
As indicated in paragraph 81 (extract enclosed) of the Monetary Policy 
Statement 2013-14 announced on May 3, 2013, ‘Prudential guidelines on 
restructuring of advances by banks / financial institutions’ have been revised 
taking into account the recommendations of the Working Group (Chairman: Shri B. 
Mahapatra) constituted in this regard and the comments received on the draft 
guidelines issued vide DBOD.BP.BC.No. /21.04.132/2012-13 dated January 31, 2013 
2. The revised instructions are given in the Annex, enumerating only the 
changed principles / instructions on the subject. Thus, these guidelines should 
be read in conjunction with instructions on the subject contained in Part B of 
the Master Circular DBOD.No.BP.BC.9/21.04.048/2012-13 dated July 2, 2012 on 
‘Prudential Norms on Income Recognition, Asset Classification and Provisioning 
pertaining to Advances’, which is an updated compilation of ‘Prudential 
Guidelines on Restructuring of Advances’ dated August 27, 2008 and subsequent 
circulars and mail-box clarifications issued on the subject. 
Yours faithfully, 
(Chandan Sinha)
Principal Chief General Manager 
Encls: as above. 
-------------------------------------------------------------------------------- 
Extract from Monetary Policy Statement 2013-14 
IV. Regulatory and Supervisory Measures 
Prudential Guidelines on Restructuring of Advances by Banks/Financial 
Institutions 
81. It was announced in the SQR that the recommendations of the Working Group 
(Chairman: Shri B. Mahapatra) to review the existing prudential guidelines on 
restructuring of advances by banks/financial institutions as also the 
comments/suggestions received in this regard were under examination and the 
draft guidelines would be issued by end- January 2013. Accordingly, the draft 
guidelines were issued on January 31, 2013 for comments till February 28, 2013. 
Taking into account the comments received, it has been decided to: 
issue the prudential guidelines on restructuring of advances by banks/financial 
institutions by end-May 2013.  
-------------------------------------------------------------------------------- 
Annex 
Prudential Guidelines on Restructuring of Advances by Banks and Financial 
Institutions 
1. Withdrawal of Regulatory Forbearance 
1.1 Existing guidelines in terms of paragraph 14.2 of the Master Circular on 
‘Prudential Norms on Income Recognition, Asset Classification and Provisioning 
pertaining to Advances’ dated July 2, 2012 (MC on IRAC Norms 2012) allow 
regulatory forbearance on asset classification of restructured accounts subject 
to certain conditions, i.e. standard accounts are allowed to retain their asset 
classification and NPA accounts are allowed not to deteriorate further in asset 
classification on restructuring. The asset classification benefit is also 
available on change of date of commencement of commercial operation (DCCO) for 
projects under infrastructure sector as well for projects under 
non-infrastructure sector (paragraph 4.2.15.3 and 4.2.15.4 of MC on IRAC Norms 
2012). 
1.2 Though international practice varies, the Working Group (WG) recommended 
that the RBI may do away with the regulatory forbearance regarding asset 
classification on restructuring of loans and advances in line with the practice 
followed in several jurisdictions. However, in view of the current domestic 
macroeconomic situation as also global situation, this measure could be 
considered say, after a period of two years. Nevertheless, the WG felt that 
extant asset classification benefits in cases of change of DCCO of 
infrastructure project loans may be allowed to continue for some more time in 
view of the uncertainties involved in obtaining clearances from various 
authorities and importance of the sector in national growth and development. 
1.3 RBI has decided to accept the above recommendation and give effect to this 
from April 1, 2015. Accordingly, the extant asset classification benefits 
available on restructuring on fulfilling certain conditions will be withdrawn 
for all restructurings effective from April 1, 2015 with the exception of 
provisions related to changes in DCCO in respect of infrastructure as well as 
non-infrastructure project loans (please see paragraph 2). It implies that a 
standard account on restructuring (for reasons other than change in DCCO) would 
be immediately classified as sub-standard on restructuring as also the 
non-performing assets, upon restructuring, would continue to have the same 
asset classification as prior to restructuring and slip into further lower 
asset classification categories as per the extant asset classification norms 
with reference to the pre-restructuring repayment schedule. 
2. Change in DCCO 
2.1 In terms of extant instructions contained in paragraphs 4.2.15.3 and 
4.2.15.4 of MC on IRAC Norms 2012, standard infrastructure and 
non-infrastructure project loans could retain the standard asset classification 
on restructuring if the DCCO is changed within a period of two years (for 
infrastructure projects) and six months (for non-infrastructure projects) from 
the original DCCOs subject to certain conditions. 
2.2 It is observed that there are occasions when the completion of projects is 
delayed for legal and other extraneous reasons like delays in Government 
approvals etc. All these factors, may lead to delays in project implementation 
and involve extension of DCCO and in many cases restructuring / reschedulement 
of loans by banks. Therefore, as recommended by the WG, it has been decided to 
continue with the extant asset classification benefits in cases of 
restructuring on account of change of DCCO of infrastructure project loans, 
until further review. 
2.3 Banks have represented that non-infrastructure projects also face similar 
genuine difficulties in achieving the DCCO as in the case of infrastructure 
projects and the extant benefit available on change of DCCO of 
non-infrastructure projects should also continue for some more time. The above 
representations have been examined by us and it has been decided that the 
existing asset classification benefit available to non-infrastructure projects 
under implementation on restructuring due to extension of DCCO in terms of 
paragraph 4.2.15.4 of MC on IRAC Norms 2012 will continue to be available until 
further review. 
2.4 Banks have also represented that the instruction that a loan for a 
non-infrastructure project would be classified as NPA if it failed to commence 
commercial operations within six months from the original DCCO, even if it was 
regular as per record of recovery {paragraph 4.2.15.4 (ii) of MC on IRAC Norms 
2012}, was not commensurate with a longer period of two years extended to 
infrastructure project loans under similar condition {paragraph 4.2.15.3 (ii) 
of MC on IRAC Norms 2012} and, therefore, a commensurate longer period may also 
be extended to non-infrastructure loans in view of the similar extraneous 
reasons for delay in achieving DCCO. It has been decided to accept their 
request and extend the prescribed period of ‘six months from the original DCCO’ 
to ‘one year from the original DCCO’ within which a non-infrastructure project 
will have to commence commercial operation for complying with the provisions of 
paragraph 4.2.15.4 (ii) of the MC on IRAC Norms 2012. Consequently, if the 
delay in commencement of commercial operations extends beyond the period of one 
year from the date of completion as determined at the time of financial 
closure, banks can prescribe a fresh DCCO and retain the “standard” 
classification by undertaking the restructuring of accounts in accordance with 
the provisions in this regard provided the fresh DCCO does not extend beyond a 
period of 2 years from the original DCCO. 
2.5 Banks have to make provision on their restructured standard infrastructure 
and non-infrastructure project loans as per paragraph 3 below apart from 
provision for diminution in fair value due to extension of DCCO/restructuring 
of loans. 
2.6 Paragraphs 4.2.15.3 (v) and 4.2.15.4 (iv) of the MC on IRAC Norms 2012 
state that for the purpose of these guidelines, mere extension of DCCO would 
also be treated as restructuring even if all other terms and conditions 
remained the same. Banks have represented to us that this provision renders any 
subsequent change in DCCO or restructuring of an infrastructure and 
non-infrastructure project loan, even within the allowed periods of time for 
retaining asset classification benefit on change of DCCO {paragraphs 4.2.15.3 
(ii) and 4.2.15.4 (ii) of MC on IRAC Norms 2012}, as repeated restructuring. 
This issue has been examined and it has been decided that mere extension of 
DCCO would not be considered as restructuring, if the revised DCCO falls within 
the period of two years and one year from the original DCCO for infrastructure 
projects and non-infrastructure projects respectively. In such cases the 
consequential shift in repayment period by equal or shorter duration (including 
the start date and end date of revised repayment schedule) than the extension 
of DCCO, would also not be considered as restructuring provided all other terms 
and conditions of the loan remain unchanged. As such project loans will be 
treated as standard assets in all respects, they will attract standard asset 
provision of 0.4 per cent. 
2.7 It has also been represented to us that commercial real estate (CRE) 
projects also face problems of delay in achieving DCCO for extraneous reasons. 
Further, as mere extension of DCCO as per extant instructions would be treated 
as restructuring in such cases, banks are averse to financing incomplete 
projects if there is a delay in the original DCCO. Therefore, it has been 
decided that mere extension of DCCO even in the case of CRE projects would not 
be considered as restructuring, if the revised DCCO falls within the period of 
one year from the original DCCO and there is no change in other terms and 
conditions except possible shift of the repayment schedule and servicing of the 
loan by equal or shorter duration compared to the period by which DCCO has been 
extended. Such CRE project loans will be treated as standard assets in all 
respects for this purpose without attracting the higher provisioning applicable 
for restructured standard assets. However, as before, the asset classification 
benefit would not be available to CRE projects if they are restructured. 
2.8 Further, banks have also represented that DCCO of infrastructure projects 
under the public private partnership (PPP) models may get extended because of 
shift in Appointed Date (as defined in the concession agreement) due to the 
inability of the Concession Authority to comply with the requisite conditions, 
and such extension in DCCO is treated as restructuring, even though borrower 
may have no control over shift in Appointed Date. In view of this, it has been 
decided to allow extensions in DCCO due to aforesaid reasons, not to be treated 
as restructuring, subject to following conditions: 
a) The project is an infrastructure project under PPP model awarded by a public 
authority; 
b) The loan disbursement is yet to begin; 
c) The revised date of commencement of commercial operations is documented by 
way of a supplementary agreement between the borrower and lender; and 
d) Project viability has been reassessed and sanction from appropriate 
authority has been obtained at the time of supplementary agreement. 
2.9 In all the above cases of restructuring where regulatory forbearance has 
been extended, the Boards of banks should satisfy themselves about the 
viability of the project and the restructuring plan. 
2.10 For the purpose of these guidelines, 'Project Loan' would mean any term 
loan which has been extended for the purpose of setting up of an economic 
venture. Infrastructure Sector is a sector as defined in extant RBI circular on 
‘Definition of Infrastructure Lending’. Borrowers must envisage a ‘date of 
completion’ and a ‘Date of Commencement of Commercial Operations (DCCO)’ for 
all projects at the time of financial closure and that should be formally 
documented. These should also be documented in the appraisal note by the bank 
during sanction of the loan. 
2.11 It is also clarified here that the provisions contained in paragraph 
4.2.15.5 (ii) of MC on IRAC Norms 2012 regarding not treating an account as a 
restructured account on account of any change in the repayment schedule of a 
project loan caused due to an increase in the project outlay on account of 
increase in scope and size of the project, subject to certain conditions, will 
continue to remain effective. 
3. General Provision on Restructured Standard Accounts 
3.1 In terms of circular DBOD.No.BP.BC.94/21.04.048/2011-12 dated May 18, 2011, 
banks are required to make a provision of 2.00 per cent on restructured 
standard accounts for different periods depending on the way an account is 
classified as restructured standard account, i.e. either abinitio or on 
upgradation or on retention of asset classification due to change in DCCO of 
infrastructure and non-infrastructure projects. 
3.2 Till such time the regulatory forbearance on asset classification is 
dispensed with, in order to prudently recognise the inherent risks in 
restructured standard assets in the interregnum, the WG had recommended that 
the provision requirement on such accounts should be increased from the present 
2 per cent to 5 per cent. This may be made applicable with immediate effect in 
cases of new restructurings (flow) but in a phased manner during a two year 
period for the existing standard restructured accounts (stock). 
3.3 As an immediate measure, the RBI increased the provision on restructured 
standard accounts to 2.75 per cent from 2.00 per cent vide circular 
DBOD.No.BP.BC.63/21.04.048/2012-13 dated November 26, 2012. It has now been 
decided to increase the provision to 5 per cent in respect of new restructured 
standard accounts (flow) with effect from June 1, 2013 and in a phased manner 
for the stock of restructured standard accounts as on March 31, 2013 as under: 
3.50 per cent – with effect from March 31, 2014 (spread over the four quarters 
of 2013-14) 
4.25 per cent – with effect from March 31, 2015 (spread over the four quarters 
of 2014-15) 
5.00 per cent - – with effect from March 31, 2016 (spread over the four 
quarters of 2015-16)  
4. Provision for Diminution in the Fair Value of Restructured Advances 
4.1 At present, in terms of paragraph 11.4 of MC on IRAC Norms 2012, detailed 
guidelines on the need for and method of calculation of diminution in the fair 
value of the restructured advances have been laid down. 
4.2 The WG was of the view that the current instructions relating to 
calculation of diminution in fair value of accounts was appropriate and 
correctly captured the erosion in the fair value. Therefore, the same might be 
continued. It also recommended that the option of notionally computing the 
amount of diminution in fair value of small accounts at 5 per cent of the total 
exposure at small/rural branches in respect of all restructured accounts where 
the total dues to bank(s) are less than ` one crore, may be provided on a long 
term basis. 
4.3 We have also received comments from various stakeholders that the option of 
notionally calculating diminution in fair value of small accounts where total 
dues to bank(s) are less than ` one crore may be extended to all kinds of 
branches. 
4.4 It has been decided to accept the above recommendation and suggestion; 
accordingly, the option of notionally computing the amount of diminution in the 
fair value of small accounts at 5 per cent of the total exposure at small/rural 
branches in respect of all restructured accounts where the total dues to 
bank(s) are less than ` one crore would be available to all branches till a 
further review in this regard. 
4.5 While the WG was of the view that the current instructions relating to 
calculation of diminution of fair value of accounts was appropriate and 
correctly captured the erosion in the fair value, it has come to our notice 
that on a few occasions there are divergences in the calculation of erosion in 
the fair value by banks. In terms of our extant instructions, the erosion in 
the fair value of the advance should be computed as the difference between the 
fair value of the loan before and after restructuring. Fair value of the loan 
before restructuring will be computed as the present value of cash flows 
representing the interest (at the existing rate charged on the advance before 
restructuring) and the principal, discounted at a rate equal to the bank's BPLR 
or base rate (whichever is applicable to the borrower) as on the date of 
restructuring plus the appropriate term premium and credit risk premium for the 
borrower category on the date of restructuring. Fair value of the loan after 
restructuring will be computed as the present value of cash flows representing 
the interest (at the rate charged on the advance on restructuring) and the 
principal, discounted at a rate equal to the bank's BPLR or base rate 
(whichever is applicable to the borrower) as on the date of restructuring plus 
the appropriate term premium and credit risk premium for the borrower category 
on the date of restructuring. 
4.6 Illustratively, divergences could occur if banks are not appropriately 
factoring in the term premium on account of elongation of repayment period on 
restructuring. In such a case the term premium used while calculating the 
present value of cash flows after restructuring would be higher than the term 
premium used while calculating the present value of cash flows before 
restructuring. Further, the amount of principal converted into debt/equity 
instruments on restructuring would need to be held under AFS and valued as per 
usual valuation norms. Since these instruments are getting marked to market, 
the erosion in fair value gets captured on such valuation. Therefore, for the 
purpose of arriving at the erosion in the fair value, the NPV calculation of 
the portion of principal not converted into debt/equity has to be carried out 
separately. However, the total sacrifice involved for the bank would be NPV of 
the above portion plus valuation loss on account of conversion into debt/equity 
instruments. The promoters’ sacrifice requirement would be based on the total 
sacrifice amount as calculated above. 
4.7 Banks are therefore advised that they should correctly capture the 
diminution in fair value of restructured accounts as it will have a bearing not 
only on the provisioning required to be made by them but also on the amount of 
sacrifice required from the promoters. Further, there should not be any effort 
on the part of banks to artificially reduce the net present value of cash flows 
by resorting to any sort of financial engineering. Banks are also advised to 
put in place a proper mechanism of checks and balances to ensure accurate 
calculation of erosion in the fair value of restructured accounts. 
5. Criteria for Upgradation of Account Classified as NPA on Restructuring 
5.1 In terms of extant instructions contained in paragraph 11.2.3 of MC on IRAC 
Norms 2012, all restructured accounts which have been classified as 
non-performing assets upon restructuring, would be eligible for upgradation to 
the 'standard' category after observation of 'satisfactory performance' during 
the 'specified period'. Further, ‘specified period’ and ‘satisfactory 
performance’ have been defined in the Annex 5 of the Master Circular ibid. 
5.2 The WG observed that in some cases of restructuring with moratorium on 
payment of principal as well as major portion of interest, the accounts were 
upgraded on the basis of payment of interest on only a small portion of the 
debt, say FITL, for the specified period. Such account may still have inherent 
credit weakness as payment of interest on a small portion of loans does not 
give evidence of ‘satisfactory performance’. 
5.3 The WG has therefore recommended that ‘specified period’ should be 
redefined in cases of restructuring with multiple credit facilities as ‘one 
year from the commencement of the first payment of interest or principal, 
whichever is later, on the credit facility with longest period of moratorium. 
Further, the WG also recommended that the accounts classified as NPA on 
restructuring by the bank should be upgraded only when all the outstanding 
loans/facilities in the account perform satisfactorily during this specified 
period, i.e. principal and interest on all facilities in the account are 
serviced as per terms of payment. 
5.4 Accordingly, it has been decided that the specified period should be 
redefined as a period of one year from the commencement of the first payment of 
interest or principal, whichever is later, on the credit facility with longest 
period of moratorium under the terms of restructuring package. 
5.5 Consequently, standard accounts classified as NPA and NPA accounts retained 
in the same category on restructuring by the bank should be upgraded only when 
all the outstanding loan/facilities in the account perform satisfactorily 
during the ‘specified period’, i.e. principal and interest on all facilities in 
the account are serviced as per terms of payment during that period. 
6. Benchmarks on Viability Parameters 
6.1 As per extant instruction vide paragraph 11.1.4 of the MC on IRAC Norms 
2012, no account will be taken up for restructuring by the banks unless the 
financial viability is established and there is a reasonable certainty of 
repayment from the borrower, as per the terms of restructuring package. The 
viability should be determined by the banks based on the acceptable viability 
benchmarks determined by them, which may be applied on a case-by-case basis, 
depending on the merits of each case. RBI had illustrated a few viability 
parameters in this regard, without giving any benchmarks for each parameter 
(ref: Paragraph 3.4 under Annex 4 of MC on IRAC Norms 2012). 
6.2 The WG recommended that RBI may prescribe the broad benchmarks for the 
viability parameters based on those used by CDR Cell; and banks may suitably 
adopt them with appropriate adjustments, if any, for specific sectors. 
6.3 It is felt that broad benchmarks prescribed in this regard will be helpful 
to banks to devise their own benchmarks for viability. However, as different 
sectors of economy have different performance indicators, it will be desirable 
that banks adopt these broad benchmarks with suitable modifications. 
6.4 Therefore, it has been decided that the viability should be determined by 
the banks based on the acceptable viability parameters and benchmarks for each 
parameter determined by them. Illustratively, the broad viability parameters 
may include the Return on Capital Employed, Debt Service Coverage Ratio, Gap 
between the Internal Rate of Return and Cost of Funds and the amount of 
provision required in lieu of the diminution in the fair value of the 
restructured advance. The benchmarks for the viability parameters adopted by 
the CDR Mechanism are given in the Appendix and individual banks may suitably 
adopt them with appropriate adjustments, if any, for specific sectors while 
restructuring of accounts in non-CDR cases. 
7. Viability Time Period 
7.1 Currently, time period for attaining viability has been prescribed as one 
of the conditions for special asset classification benefit on restructuring. 
For this purpose, paragraph 14.2.2 (ii) of the MC on IRAC Norms 2012 prescribes 
the condition that the unit should become viable in 10 years, if it is engaged 
in infrastructure activities, and in 7 years in the case of other units. 
7.2 The WG felt that the prescribed time span of seven years for 
non-infrastructure borrowal accounts and ten years for infrastructure accounts 
for becoming viable on restructuring was too long and banks should take it as 
an outer limit. 
7.3 In line with the WG’s recommendation, it has been decided that banks should 
ensure that the unit taken up for restructuring achieves viability in 8 years, 
if it is engaged in infrastructure activities, and in 5 years in other cases. 
8. Incentive for Quick Implementation of Restructuring Package 
8.1 In terms of extant instruction contained in paragraph14.2.1 of MC on IRAC 
Norms 2012, during the pendency of the application for restructuring of the 
advance with the bank, the usual asset classification norms would continue to 
apply. However, as an incentive for quick implementation of the package, if the 
approved package is implemented by the bank as per the following time schedule 
and subject to fulfilment of certain conditions, the asset classification 
status may be restored to the position which existed when the reference was 
made to the CDR Cell in respect of cases covered under the CDR Mechanism or 
when the restructuring application was received by the bank in non-CDR cases: 
(i) Within 120 days from the date of approval under the CDR Mechanism. 
(ii)Within 90 days from the date of receipt of application by the bank in cases 
other than those restructured under the CDR Mechanism. 
8.2 In case of non-CDR restructurings, asset classification benefit is 
available in case the restructuring package gets implemented within 90 days 
from the date of receipt of application. As 90 days period after receipt of 
application is considered insufficient for properly ascertaining the viability 
of the account, the WG recommended that the period for quick implementation 
under non-CDR mechanism including SME Debt Restructuring mechanism should be 
increased to 120 days from the date of application. 
8.3 Accordingly, it has been decided that the incentive for quick 
implementation of the restructuring package in non-CDR cases would henceforth 
be available, if the approved package is implemented by the bank within 120 
days from the date of receipt of application. There is no change in the time 
period as regards CDR mechanism. 
8.4 However, it is clarified that no such incentive would be available on 
withdrawal of regulatory forbearance on restructuring with effect from April 1, 
2015, except in cases of restructuring by change of DCCO of infrastructure and 
non-infrastructure project loans as specified in this circular. 
9. Roll over of Short-Term Loans 
9.1 As per existing instruction contained in Sl. No. (iv) under ‘Key Concepts’ 
in Annex 5 to  Master Circular on IRAC Norms 2012, a restructured account is 
defined as one where the bank, for economic or legal reasons relating to the 
borrower's financial difficulty, grants to the borrower concessions that the 
bank would not otherwise consider. Restructuring would normally involve 
modification of terms of the advances/securities, which would generally 
include, among others, alteration of repayment period /repayable amount/the 
amount of instalments/rate of interest (due to other than competitive reasons). 
In view of this definition, any roll-over of a short term loan will be 
considered as ‘restructuring’. 
9.2 The WG recommended that RBI may clarify that the cases of roll-over of 
short term loans, where proper pre-sanction assessment has been made, and the 
roll-over is allowed based on the actual requirement of the borrower and no 
concession has been provided due to credit weakness of the borrower, then these 
might not be considered as restructured accounts. However, if such accounts are 
rolled-over more than 2 times, then third roll-over onwards the account would 
have to be treated as a restructured account. Besides, banks should be 
circumspect while granting such facilities as the borrower may be availing 
similar facilities from other banks in the consortium or under multiple 
banking. 
9.3 It has been decided to accept the recommendation. However, it is clarified 
that Short Term Loans for the purpose of this provision do not include properly 
assessed regular Working Capital Loans like revolving Cash Credit or Working 
Capital Demand Loans. 
10. Promoters’ Sacrifice 
10.1 In terms of extant instruction contained in paragraph 14.2.2.(iv)of MC on 
IRAC Norms 2012, one of the conditions for eligibility for regulatory asset 
classification benefit on restructuring is that promoters' sacrifice and 
additional funds brought by them should be a minimum of 15 per cent of banks' 
sacrifice. The term 'bank's sacrifice' means the amount of "erosion in the fair 
value of the advance". It is also prescribed that promoters’ sacrifice may be 
brought in two instalments and it may be brought in different forms as 
indicated therein. 
10.2 The WG recommended that RBI may consider a higher amount of promoters’ 
sacrifice in cases of restructuring of large exposures under CDR mechanism. 
Further, the WG recommended that the promoters’ contribution should be 
prescribed at a minimum of 15 per cent of the diminution in fair value or 2 per 
cent of the restructured debt, whichever is higher. 
10.3 It has been decided that promoters’ sacrifice and additional funds brought 
by them should be minimum of 20 per cent of banks’ sacrifice or 2 per cent of 
the restructured debt, whichever is higher. This stipulation is the minimum and 
banks may decide on a higher sacrifice by promoters depending on the riskiness 
of the project and promoters’ ability to bring in higher sacrifice amount. 
Further, such higher sacrifice may invariably be insisted upon in larger 
accounts, especially CDR accounts. The promoters’ sacrifice should invariably 
be brought upfront while extending the restructuring benefits to the borrowers. 
11. Conversion of Debt into Equity / Preference Shares 
11.1 At present vide paragraphs 15.1, 15.2 & 15.3 of MC on IRAC Norms 2012, 
there is no regulatory cap on the percentage of debt which can be converted 
into equity/preference shares on restructuring of advances, subject to 
adherence to statutory requirement under Section 19 of the BR Act 1949 and 
relevant SEBI regulations. 
11.2 The WG recommended that conversion of debt into preference shares should 
be done only as a last resort and such conversion of debt into 
equity/preference shares should, in any case, be restricted to a cap (say 10 
per cent of the restructured debt). It also recommended that any conversion of 
debt into equity should be done only in the case of listed companies. 
11.3 It has been decided to accept the recommendation and banks should be 
guided accordingly. 
12. Right of Recompense 
12.1 In terms of existing instruction contained in paragraph 5.7 under Annex 4 
of the MC on IRAC Norms 2012 all CDR approved packages must incorporate 
creditors' right to accelerate repayment and borrowers' right to pre-pay. The 
right of recompense should be based on certain performance criteria to be 
decided by the Standing Forum. 
12.2 The WG recommended that CDR Standing Forum/Core Group may take a view as 
to whether their clause on ‘recompense’ may be made somewhat flexible in order 
to facilitate the exit of the borrowers from CDR Cell. However, it also 
recommended that in any case 75 per cent of the amount of recompense calculated 
should be recovered from the borrowers and in cases of restructuring where a 
facility has been granted below base rate, 100 per cent of the recompense 
amount should be recovered. 
12.3 The WG also recommended that the present recommendatory nature of 
‘recompense’ clause should be made mandatory even in cases of non-CDR 
restructurings. 
12.4 Accordingly, it has been decided that all restructuring packages must 
incorporate ‘Right to recompense’ clause and it should be based on certain 
performance criteria of the borrower. In any case minimum 75 per cent of the 
recompense amount should be recovered by the lenders and in cases where some 
facility under restructuring has been extended below base rate, 100 per cent of 
the recompense amount should be recovered. 
13. Personal Guarantee of Promoters 
13.1 As per the extant restructuring guidelines, personal guarantee by the 
promoter is one of the necessary conditions (paragraph 14.2.2 of MC on IRAC 
Norms 2012) for the asset classification benefit except when the unit is 
affected by external factors pertaining to the economy and industry. 
13.2 As stipulating personal guarantee will ensure promoters’ “skin in the 
game” or commitment to the restructuring package, the WG recommended that 
obtaining the personal guarantee of promoters be made a mandatory requirement 
in all cases of restructuring, i.e. even if the restructuring is necessitated 
on account of external factors pertaining to the economy and industry. It also 
recommended that corporate guarantee cannot be a substitute for the promoters’ 
personal guarantee. 
13.3 Accordingly, it has been decided that promoters’ personal guarantee should 
be obtained in all cases of restructuring and corporate guarantee cannot be 
accepted as a substitute for personal guarantee. However, corporate guarantee 
can be accepted in those cases where the promoters of a company are not 
individuals but other corporate bodies or where the individual promoters cannot 
be clearly identified. 
-------------------------------------------------------------------------------- 
Appendix 
Broad benchmarks for the viability parameters 
Return on capital employed should be at least equivalent to 5 year Government 
security yield plus 2 per cent. 
The debt service coverage ratio should be greater than 1.25 within the 5 years 
period in which the unit should become viable and on year to year basis the 
ratio should be above 1. The normal debt service coverage ratio for 10 years 
repayment period should be around 1.33. 
The benchmark gap between internal rate of return and cost of capital should be 
at least 1per cent. 
Operating and cash break even points should be worked out and they should be 
comparable with the industry norms. 
Trends of the company based on historical data and future projections should be 
comparable with the industry. Thus behaviour of past and future EBIDTA should 
be studied and compared with industry average. 
Loan life ratio (LLR), as defined below should be 1.4, which would give a 
cushion of 40% to the amount of loan to be serviced. 
Present value of total available cash flow (ACF) during the loan life period
(including interest and principal)