Defaulted or late-paying loans and advances are classified as nonperforming assets (NPAs). When a loan’s principle or interest payments are past due or skipped, that debt is said to be in arrears. An NPA Loan arrangement is breached and the debtor is unable to satisfy his commitments, the loan is in default.
In a restructuring, a lender makes concessions to a borrower because of the borrower’s financial hardship or for legal grounds. Changes to advance or security terms and conditions, such as lengthening the time to pay back the advance or increasing the amount owed in instalments or increasing the credit limit are all common during restructuring. Compromise settlements, where the time to pay the settlement amount exceeds three months, are also common during restructuring.
Prudential Norms
- Asset Classification
In the event that the organization undergoes a reorganization, the accounts that were previously categorized as “standard” would instantly be demoted as “non-performing assets” (NPAs), also known as “sub-standard” to begin with. After the restructuring, the non-performing assets would still be classified in the same way as they were before the reorganization. In either scenario, the ageing criteria that are outlined in the asset classification guidelines that are already in place are going to continue to control how the assets are classified.
- Conditions for Upgrade
Standard accounts classified as NPA Restructuring and NPA accounts retained in the same category on restructuring by the lenders may be upgraded only when all the outstanding loan / facilities in the account demonstrate ‘satisfactory performance’ (i.e., the payments in respect of borrower entity are not in default at any point of time) during the ‘specified period’ (as defined in paragraph 10 of the covering circular).
Additionally, the borrower’s credit facilities must be BBB- or better at the end of the specified period by CRAs accredited by the Reserve Bank for the purpose of bank loan ratings in order to qualify for an upgrade for large accounts, which are accounts with an aggregate exposure of more than 1 billion. Accounts having a combined exposure of more than five billion rupees need two ratings, but those with a combined exposure of less than five billion rupees only require one rating. In order to qualify for an upgrade, an investment grade rating must be received from more than one CRA.
