• Restructuring means change in structure of the account
• Basic objective is to preserve economic value of units, not evergreening of problem account
• This can be achieved only if:

 a) weakness of account is identified quickly

 b) viability is assessed properly  and

 c) restructuring package is implemented timely.

Signs of Financial Difficulty

• Failure/ anticipated failure to make timely payment of installments.
• Delay in meeting commitments – crystallized liabilities under LC/BG etc.
• Excessive leverage
• Inability to adhere to financial loan covenants
• Failure to pay statutory liabilities
• Non-payment  of bills to operational creditors
• Non-submission or undue delay in submission of stock statement,  delay in publication of financial statements and adversely qualified financial statements
• Steep decline in production figures, downward trends in sales, fall in profits, margin erosion etc
• Elongation of working capital cycle, excessive inventory build-up
• Significant delay in project implementation
• Downward migration of internal/external ratings

 Definition of Sickness ( MSMED Act, 2006)

• Any of the borrowal account of the enterprise remains NPA for three months or more

OR

• There is erosion in the net worth due to accumulated losses to the extent of 50% of its net worth during the previous accounting year

 Corrective Action Plan

• Rectification
• Restructuring
• Recovery

 Hand holding Stage

• There is delay in commencement of commercial production by more than six months for reasons beyond the control of the promoters
• Company incurs losses for two years or cash loss for one year, beyond the accepted time frame
• Capacity utilization is less than 50% of the projected level in terms of quantity 
• Sales are less than 50% of the projected level in terms of value during a year.

 Restructuring

• All viable or potentially viable accounts classified as ‘Standard’, ‘Sub-Standard’ or ‘Doubtful’ category except those indulging in ‘fraud’, or ‘willful defaulters’
• Above 20 crore – subjected to TEV study
• Large accounts (above 100 cr) shall required ‘Independent Credit Evaluation (ICE)’ of the residual debt by Credit Rating Agencies
• Viability Benchmarks

 Viability Benchmarks

• Repayment schedule not to exceed 15 years in case of infrastructure & 10 years for others.
• DSCR should be greater than 1.25 within a 5 year period and the year to year ratio should be above 1. DSCR for the 10 year repayment period should be around 1.33.
• Operating and Cash Break Even Points should be comparable with the industry norms.
• Current Ratio should be around 1.17 within a period of 5 years.
• DE Ratio should be around 4:1 and TOL/TNW to be around 6:1 in five years
• Loan Life Ratio (LLR) should be 1.4.

 Expert Committee on 26 Sectors

Financial Parameters

• TOL / Adjusted TNW
• Total Debt / EBIDTA
• Current Ratio
• Debt Service Coverage Ratio (DSCR)
• Average Debt Service Coverage Ratio 

 If  loan modification/restructuring is a mutual contract between the lender and the borrower, should a borrower  be concerned with  the regulatory framework?

 Prudential Norms on Restructuring

• Standard Asset to immediately downgraded to Sub-standard Asset
• NPA, on restructuring, would continue to have the same asset classification as prior to restructuring.

 Conditions for upgrade

• When all the outstanding credit facilities  demonstrate ‘satisfactory performance’ during the “Specified Period”. 
• ‘Specified Period’ means the period from the date of implementation of RP up to the date by which at least 10% of the outstanding principal debt is repaid
• Provided that the ‘Specified Period’ cannot end before one year from the commencement of the first payment of interest or principal (whichever  is later) on the credit facility.  

 Additional Finance

• To be treated as ‘Standard Asset’ during Specified Period.  
• If the restructured asset fails to perform satisfactorily during the specified period or does not qualify for up gradation at the end specified period, the additional finance shall be placed in the same asset classification category as restructured debt.

 Income Recognition Norms

• Restructured A/c classified as ‘standard asset’ ---on accrual basis
• Restructured A/c classified as NPA ---on cash basis
• In case of additional finance where pre-restructuring facilities were classified as NPA, the interest income shall be recognized only on cash basis except :-
• when the restructuring is accompanied by a ‘change in ownership’

 Change in Ownership

• Credit facilities may be continued / upgraded as ‘Standard’ after Change in Ownership is implemented. 

Conditions:

• Acquirer is not a person disqualified in terms of Section 29A of IBC-2016
• New promoter shall have acquired at least 26% of the paid-up equity capital of the borrower entity and shall be the single largest shareholder of the borrower entity.
• New promoter shall be in ‘control’ of the borrower entity as per the definition of ‘control’ in the Companies Act 2013 / regulations issued by SEBI / any other applicable regulations

 WCTL  &  FITL

• Reduction in Limit
• Reduction in Drawing Power
• Interest Overdrawn
• Granting moratorium period to service future interest