RBI recommends uniform formula for restructured loans

The Reserve Bank of India has formulated a uniform formula to work out the reduction in fair value of restructured loans.

Reduction is the cut down value of loans that have come for restructuring.

Banks rate restructured loans differently in different economic cycles. This is because the reduction or depreciation in rate generally linked with the universal rise in the interest rates in the economy.

The formula was particularly required due to higher provisioning because of rise in the rate of interest during last few years which added to the financial difficulties when banks’ margins were already under stress because of the current downturn.

Thus, the RBI analyzed that the formula can be modified in such a way that the changes in fair value of the loan credited to the changes in market interest rates are not taken into account while calculating the reduction.

RBI rule

Last month the Reserve Bank of India had directed the banks to consider floating provisions as part of tier capital II instead of deducting them to arrive at net NPA position for the financial year ended March 2009. But on Thursday RBI postponed the implementation of rule that prevents banks from deducting floating provision (made for non-performing assets) from the Gross NPAs for the financial year 2009-10.