Financial Daily from THE HINDU group of publications
Friday, Jun 07, 2002
RBI & Other Central Banks
Money & Banking - Non-Performing Assets
Projects facing time overruns must be treated as NPAs: RBI
BANGALORE, June 6
BANKS and financial institutions (FI) are expected to begin treating projects faced with time overruns as non-performing assets (NPA).
Sources said that the RBI has issued detailed guidelines to all the PSU banks and FIs. The RBI directive, which takes effect immediately, is expected to knock the bottomlines of the FIs and banks beginning from the first quarter of this financial year.
The sources also said that the RBI's notification implied that power projects including the Enron promoted Dabhol Power Company (DPC) are finally likely to be treated as a non-performing asset (NPA). So far FIs and banks have baulked at treating DPC as NPA. Instead FIs have treated power project including DPC as project under implementation, they added.
The new guidelines specify that projects, which have attained financial closure, would be allowed to be treated as a standard asset only for a period of two years beyond the date of completion.
This would imply that there would be a grace period of just two years. Beyond this period both banks and FIs would have to start making provisions. The notification also makes it amply clear that if the project implementation exceeds the deadline of two years, irrespective of the term loan recovery record, the assets could still be treated as a substandard asset.
This would now mean that the FIs would have to start making provisions for DPC from this year onwards. So far only some participants among the rupee lenders have actually made provisions for DPC as a measure of caution, especially since none of them currently has any recourse to either corporate or sovereign guarantees.
Only foreign lenders have been provided this succour. Despite making provisions for DPC lendings, none of the banks/FIs has treated the assets as NPA.
Along with DPC there are also a series of special purpose vehicles (SPV) floated by State Governments for implementing ambitious hydel and irrigation projects, which are expected to fall into the category of projects being treated "under implementation.''
Wherever such projects have incurred time overruns, the RBI guidelines have now specified that income recognition of debt servicing would have to be treated on a realised basis.
Currently in some of these projects, where time overruns have taken place, the FIs/banks have continued to treat interest income and principal payments on an accrual basis, the sources said.
Further the guidelines have also tightened norms relating to funding and capitalisation of interest. Wherever interest payments have been funded, and recognised as income, lenders have been told to make simultaneous provisions of an equal amount.
As for conversion of outstanding dues into equity or debentures, they would have to be normally split into interest and principal.
Where the interest is capitalised and consequently recognised as income, the new guidelines specify that full provisions would have to be made. These provisions are to offset the effect of the income recognition.
In addition, where the equity is listed, lenders have been advised to treat them on "available for sale basis'' and value them at market prices. Accordingly depreciation would also have to be provided for these assets.
Where the NPAs are converted into debentures, the RBI has specified that these instruments would also have to be treated identically from the conversion date.
Such treatment would also apply to conversion into zero coupon debentures, which allows the issuers to defer interest payments, the guidelines specify.
The sources said that these guidelines would knock the bottomlines of several banks and FIs, which have escaped making provisions by resorting to conversions into either debt/equity.
The worst hit by these norms are likely to be the FIs, who would now be expected to make full provisions.
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