Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances – Refinancing of Exposures to Borrowers: RBI

RBI/2014–15/539 DBR.No.BP.BC.85/21.04.048/2014–15

April 6, 2015

In terms of cir­cu­lar DBOD.No.BP.BC.107/21.04.048/2013–14 dat­ed April 22, 2014 and A.P. (DIR Series) Cir­cu­lar No.129 dat­ed May 9, 2014, Indi­an com­pa­nies are not per­mit­ted to raise exter­nal com­mer­cial bor­row­ings (ECB) from over­seas branch­es / sub­sidiaries of Indi­an banks for the pur­pose of refi­nance / repay­ment of the rupee loans raised from the domes­tic bank­ing system.

2. Fur­ther, in terms of the cir­cu­lar dat­ed April 22, 2014, it was advised that util­i­sa­tion of export advances, received on the strength of guar­an­tees issued by Indi­an banks, for repay­ment of loans availed of from Indi­an banks (except in cas­es where banks have received approvals under the For­eign Exchange Man­age­ment Act 1999) is not in com­pli­ance with our instruc­tions. In this con­nec­tion, in terms of instruc­tions con­tained in A.P. (DIR Series) Cir­cu­lar No.132 dat­ed May 21, 2014 on ‘Export of Goods — Long Term Export Advances’, eli­gi­ble exporters were allowed to receive long term export advance to be uti­lized for exe­cu­tion of long term sup­ply con­tracts for export of goods. Such exporters were also allowed to use such export advances to liq­ui­date rupee loans which are not clas­si­fied as non-per­form­ing assets as per the Reserve Bank of India asset clas­si­fi­ca­tion norms, sub­ject to cer­tain conditions.

3. In this con­nec­tion, it is reit­er­at­ed that export per­for­mance guar­an­tees, where per­mit­ted to be issued, shall strict­ly be in the nature of per­for­mance guar­an­teeand shall not con­tain any claus­es which may in effect allow such per­for­mance guar­an­tees to be utilised as finan­cial guarantees/Standby Let­ters of Cred­its.

4. It has been observed that the facil­i­ty of long term export advances is pri­mar­i­ly being utilised for refi­nanc­ing rupee loans of bor­row­ers instead of being used for exe­cu­tion of long term sup­ply con­tracts for export of goods. In order to ensure that long term export advances are used for the intend­ed pur­pose, it is advised that while eli­gi­ble Indi­an com­pa­nies may con­tin­ue to avail of the facil­i­ties avail­able to them under the guide­lines men­tioned in the above para­graphs, any repayment/refinancing of rupee loans with for­eign cur­ren­cy borrowings/export advances, where per­mit­ted, will be sub­ject to the fol­low­ing con­di­tions:

a) If the for­eign cur­ren­cy borrowings/export advances, where per­mit­ted under the guide­lines issued under the For­eign Exchange Man­age­ment Act, 1999 (42 of 1999), are obtained from lenders who are not part of the Indi­an bank­ing sys­tem (Indi­an bank­ing sys­tem would include all banks in India and over­seas branch/subsidiary/joint ven­ture of Indi­an banks) with­out any sup­port from the Indi­an bank­ing sys­tem in the form of Guarantees/Standby Let­ters of Credit/Letters of Com­fort etc., the same may be utilised to refinance/repay loans availed from the Indi­an bank­ing system.

b) If the for­eign cur­ren­cy borrowings/export advances are obtained:

1. from lenders who are part of Indi­an bank­ing sys­tem (where per­mit­ted); or
2. with sup­port (where per­mit­ted) from the Indi­an bank­ing sys­tem in the form of Guarantees/Standby Let­ters of Credit/Letters of Com­fort, etc.;

then, in addi­tion to any applic­a­ble guide­lines issued under the For­eign Exchange Man­age­ment Act, 1999 (42 of 1999), the refi­nance shall be treat­ed as ‘restruc­tur­ing’ (and classified/provided for as per extant pru­den­tial norms on income recog­ni­tion, asset clas­si­fi­ca­tion and pro­vi­sion­ing), if the above borrowings/export advances are extend­ed to a bor­row­er who is under finan­cial dif­fi­cul­ty and involve con­ces­sions that the bank would oth­er­wise not con­sid­er. A non-exhaus­tive and indica­tive list of signs of finan­cial dif­fi­cul­ty is annexed.

5. It is fur­ther advised that repayment/refinancing of for­eign cur­ren­cy bor­row­ings out­stand­ing with a bank, by way of rupee loans or anoth­er for­eign cur­ren­cy loan (where per­mit­ted) or based on sup­port (where per­mit­ted) in the form of Guarantees/Standby Let­ters of Credit/Letters of Com­fort, etc. from lenders who are part of Indi­an bank­ing sys­tem would also be gov­erned by the pru­den­tial guide­lines stip­u­lat­ed at 4(b) above.

Yours faith­ful­ly,

(Sudar­shan Sen)
Chief Gen­er­al Manager-in-Charge

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Annex

Non-Exhaus­tive Indica­tive List of Signs of Finan­cial Difficulty

• Con­tin­u­ous irreg­u­lar­i­ties in cash credit/overdraft accounts such as inabil­i­ty to main­tain stip­u­lat­ed mar­gin on con­tin­u­ous basis or draw­ings fre­quent­ly exceed­ing sanc­tioned lim­its, peri­od­i­cal inter­est deb­it­ed remain­ing unrealised;
• Repeat­ed undue delay in mak­ing time­ly pay­ment of instal­ments of prin­ci­pal and inter­est on term loans;
• Undue delay in meet­ing com­mit­ments towards pay­ments of install­ments due, crys­tal­lized lia­bil­i­ties under LC/BGs, etc.
• Con­tin­u­ing inabil­i­ty to adhere to finan­cial loan covenants;
• Fail­ure to pay statu­to­ry lia­bil­i­ties, non- pay­ment of bills to sup­pli­ers of raw mate­ri­als, water, pow­er, etc.;
• Non-sub­mis­sion or undue delay in sub­mis­sion or sub­mis­sion of incor­rect stock state­ments and oth­er con­trol state­ments, delay in pub­li­ca­tion of finan­cial state­ments and exces­sive­ly qual­i­fied finan­cial statements;
• Delay in project implementation;

• Down­ward migra­tion of internal/external ratings/rating outlook.