GUIDELINES FOR DEBT RESTRUCTURING FOR SMALL & MEDIUM ENTERPRISES (SMEs) Reserve Bank of India has come

up with the revised guidelines including the permission of second time restructuring without down grading the asset into Non-performing grade if restructured by 30.06.2009. The detailed guidelines are provided as under: 2. Definition of SMEs: Small and Medium Enterprises will be defined as per the definition contained in Banks Policy on Financing to Micro, Small and Medium Enterprises approved by Board of Directors in their meeting dated 20.03.2008. (Issued vide circular no. 9984/PSC/SME/2007-08/60 Dated 29.03.2008, which reads as under: 2.1 Small Enterprises: Manufacturing: Enterprises engaged in the manufacture/ production, processing or preservation of goods and whose investment in Plant and Machinery (Original cost excluding Land and building and the items specified by the Ministry of Small Scale Industries (vide its notification no. S.O.1722 (E) dated October 5, 2006 ) is above Rs.25 Lacs to Rs.5Crore. 2.2 Small Enterprises: Services: Enterprises engaged in the providing/rendering of services and whose investment in Equipment (Original cost excluding Land and building and furniture, fittings and other not directly related to the service rendered or as may be under the Micro, Small and Medium Enterprises Development, Act 2006) is above Rs.10Lacs to Rs.2Crore. The Small Enterprises (Service) shall include Small Road & water Transport Operator (SRWTO), Professional and Self Employed (PSEP), Small Business and all other service enterprises, whose investment in equipment is above Rs.10Lacs to Rs.2Crore. 2.3 Medium Enterprises: Manufacturing: Enterprises engaged in the manufacture/ production, processing or preservation of goods and whose investment in Plant and Machinery Original cost excluding Land and building and the items specified by the Ministry of Small Scale Industries vide its notification no. S.O.1722 (E) dated October 5,2006) is more than Rs.5Crore but does not exceed Rs.10Crore 2.4 Medium Enterprise: Services: Enterprises engaged in the providing/rendering of services and whose investment in Equipment(Original cost excluding Land and building and furniture, fittings and other not directly related to the service rendered or as may be under the Micro, Small and Medium Enterprises Development, Act 2006) is more than Rs.2Crore but does not exceed Rs.5Crore. The Medium Enterprises (Service) shall include Road Transport Operator (RTO), Professional and Self Employed (PSEP), Business and all other service enterprises, whose investment in equipment is above Rs.2.00 Crore to Rs.5.00 Crore. 3. Eligibility Criteria: These guidelines would be applicable to the following entities, which are viable or potentially viable SME units/ Advances:

3.1. All SME borrowers, which are enjoying banking facilities from a single bank. 3.2. All SME borrowers which have funded and non-funded outstanding up to Rs.10.00crore under multiple/consortium banking arrangement. 3.3. The SME Debt Restructuring Mechanism will be available to all SME borrowers engaged in any type of activity. 3.4 Borrowers indulging in fraud and malfeasance will not be eligible for restructuring under these guidelines. However, willful defaulter in exceptional cases, will be considered as advised in para- 3.9 below. 3.5. The Bank may restructure the accounts classified under 'Standard', 'Sub-Standard' and 'Doubtful' categories. Accounts classified by the bank as Loss Assets will not be eligible for restructuring. 3.6. The Bank can not reschedule / restructure / renegotiate borrowal accounts with retrospective effect. While a restructuring proposal is under consideration, the usual asset classification norms would continue to apply. The process of re-classification of an asset should not stop merely because restructuring proposal is under consideration. The asset classification status as on the date of approval of the restructured package by the competent authority would be relevant to decide the asset classification status of the account after restructuring / rescheduling / renegotiation. In case there is undue delay in sanctioning a restructuring package and in the meantime the asset classification status of the account undergoes deterioration, it would be a matter of supervisory concern. 3.7. The process of restructuring can be initiated in deserving cases subject to customer/ Guarantor agreeing to the terms and conditions. 3.8. In respect of BIFR cases, the branch should ensure completion of all formalities in seeking approval from BIFR before implementation of the package. 3.9 WILLFUL DEFAULTERS Borrowers indulging in frauds and malfeasance will continue to remain ineligible for restructuring under the Debt Restructuring Mechanism for SMEs as hitherto. However, branches may review the reasons for classification of the borrower as willful defaulter specially in old cases where the manner of classification of a borrower as a willful defaulter was not transparent and satisfy itself that the borrower is in a position to rectify the willful default provided he is granted an opportunity under the Debt Restructuring Mechanism for SMEs. Such exceptional cases will be considered for restructuring with the approval of the Bank's Board only. 4. Viability Criteria : 4.1 A unit may be regarded as viable if it would be in a position after implementing a relief package (including restructuring/rescheduling /renegotiation) over a period not exceeding 10 years (in case of infrastructure activity) and 7 years in case of other activities , from the date of commencement of package from Banks / other agencies , to service its repayment obligations as agreed upon , including those forming the part of the package , without the help of the concessions after that period. 4.2 No account will be taken up for restructuring by the Bank unless the financial viability is established and there is reasonable certainty of repayment from the borrower as per terms of restructuring package. The accounts not considered viable should not be

restructured and bank would accelerate recovery measures in respect of such accounts. Any restructuring done without looking into the cash flows of the borrower and assessing the viability of the project / activity financed by the bank would be treated as an attempt at ever greening a weak credit facility. The viability test should satisfy following conditions: 4.2.1 The unit becomes viable in 10 years, if it is engaged in infrastructure activities, and in 7 years in the case of other units. 4.2.2. The repayment period of the restructured advance including the moratorium, if any, does not exceed 15 years in the case of infrastructure advances and 10 years in the case of other advances. 4.2.3. Promoters Sacrifice and additional funds brought by them should be a minimum of 15% of banks sacrifice. 4.2.4. Personal Guarantee to be offered by the promoter except when the unit is affected by external factors pertaining to the economy and industry 5. Other viability Criteria: 5.1 Debt Service Coverage Ratio: Should have Minimum average DSCR of 1.25, with minimum of 1.00 during a year. 5.2 Current Ratio: In case of Working Capital finance normally, the current ratio should not fall below 1.25:1. However in exceptional circumstances current ratio may be permitted up to 1:1. 5.3 The assessment of the requirement will be based on the methodologies enumerated in the Banks Lending Policy for different types of the activities. 5.4 Any deviation from the above parameters should be recorded in the appraisal note with proper justifications and the same may be permitted at the level of General Manager and above up to their respective authority on case to case basis, based on merit of the case, but unit being found viable. 6. Relief and Concession: 6.1. Waiver and sacrifices in a stressed asset for restructuring would depend on the state of affairs of the borrower, viability of the company, the possibility of revival / survival as there can not be any uniform prescription for Debt Restructuring being each case unique. The thrust of the restructuring exercise would be to recover maximum possible amount from the borrower. 6.2 Following relief and concessions in terms of Rate of interest for revival of potentially viable SMEs may be granted based on commercial judgment and merit of each case:Type of Facility Interest on Working Capital Funded Interest Term Loan Working Capital Term Interest Rate Interest @ 1.5% below the prevailing rate/ prime lending rate, wherever applicable may be given. Interest free, to be repaid within maximum period of 35 years Interest may be charged @ 2% below the prevailing

Loan Term Loan

rate / prime lending rate, wherever applicable, to be repaid within a maximum period of 3-5 years. Concessions in the interest may be given not more than 1.5% below the prevailing rate in case of Medium Enterprises and 2% below the prevailing rate / minimum lending rate in case of others, wherever applicable or as prescribed by SIDBI / NABARD where refinance assistance is obtained from it for the purpose in the case of small and tiny enterprises.

6.3. The relief and concessions specified above is not to be given in a routine manner and have to be decided on the commercial judgment and merits of each case.. 6.4. There may be deserving cases where relief and concessions beyond the parameters indicated above may have to be extended for revival of a potentially viable unit. However the authority for such reduction in rate of interest would vest with General Manager and above up to their respective authority on case to case basis, as per Banks Domestic Lending policy / Interest rate policy. 7. Asset classification norms:(Exceptional Regulatory Treatment): 7.1 Restructuring of advances could take place in the following stages : (a) before commencement of commercial production/ operations; (b) after commencement of commercial production/operations but before the asset has been classified as sub-standard; (c) after commencement of commercial production/operation and the asset has been classified as sub-standard or doubtful. 7.2 The accounts classified as Standard Assets will not be downgraded to SubStandard Category upon restructuring subject to satisfactory performance. 7.3 The non-performing assets i.e. Sub Standard and Doubtful upon restructuring would continue to have the same asset classification as prior to restructuring and will not deteriorate upon restructuring if satisfactory performance is demonstrated during the specified period. However, these would qualify for upgradation subject to conditions as specified under Para: 7.5. 7.4. However, these benefits will be available subject to compliance of following conditions: 7.4.1. The dues to the bank are fully secured as defined in Appendix-(2). The condition of being fully secured by tangible security will not be applicable in the following cases: 7.4.2. SSI borrowers, where the outstanding is up to Rs.25 lakh. 7.4.3 Infrastructure projects, provided the cash flows generated from these projects are adequate for repayment of the advance, the financing bank(s) have in place an appropriate mechanism to escrow the cash flows, and also have a clear and legal first claim on these cash flows. 7.4.4. The unit becomes viable in 10 years, if it is engaged in infrastructure activities, and in 7 years in the case of other units.

7.4.5. The repayment period of the restructured advance including the moratorium, if any, does not exceed 15 years in the case of infrastructure advances and 10 years in the case of other advances. 7.4.6. Promoters' sacrifice and additional funds brought by them should be a minimum of 15% of banks sacrifice. 7.4.7. Personal guarantee is offered by the promoter except when the unit is affected by external factors pertaining to the economy and industry. 7.4.8. The restructuring under consideration is not a 'repeated restructuring', However as a one time special regulatory measures, the second time restructuring in case of SME advances has been permitted if the restructuring is effected within 30.06.2009 and such restructuring would be eligible for exceptional Regulatory treatment, subject to compliance with conditions as above. 7.5. All restructured accounts which have been classified as non-performing assets upon restructuring, would be eligible for up-gradation to the standard category after observation of satisfactory performance during the specified period. (Here specified period means a period of one year from the date when the first payment of interest or installment of principal falls due under the terms of restructuring). 7.6 In case, however, satisfactory performance after the specified period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule. 7.7. Any additional finance may be treated as standard asset, up to a period of one year after the first interest / principal payment, whichever is earlier, falls due under the approved restructuring package. 7.8. However, in the case of accounts where the pre- restructuring facilities were classified as sub-standard and doubtful, interest income on the additional finance should be recognized only on cash basis. If the restructured asset does not qualify for upgradation at the end of the above specified one year period, the additional finance shall be placed in the same asset classification category as the restructured debt. 7.9. Incentive for quick implementation of the restructuring package: The process of reclassification of an asset should not stop merely because the application is under consideration. However, if the package is approved and implemented within 90 days from the date of receipt of application by the bank in cases SME advances, the asset classification status may be restored to the position which existed when the reference was made or when the restructuring application was received by the bank in non-CDR cases: 8. Income recognition norms: 8.1. Interest income in respect of restructured accounts classified as 'standard assets' will be recognized on accrual basis and that in respect of the accounts classified as 'nonperforming assets' will be recognized on cash basis.

9. Provisioning norms:
Normal provisions:

The Bank will hold provision against the restructured advances as per the existing norms. Provision for diminution in the fair value of restructured advances: Reduction in the rate of interest and /or reschedulement of the repayment of principal amount, as part of the restructuring, will result in diminution in the fair value of the advance. Such diminution in value is an economic loss for the bank and will have impact on the banks market value of equity. It is, therefore, necessary for the bank to measure such diminution in the fair value of the advance and make provisions for it by debit to Profit & Loss Account. Such provision should be held in addition to the provisions as per existing provisioning norms and in an account distinct from that for normal provisions. For this purpose, the erosion in the fair value of the advance should be computed as the difference between the "the present value of future cash flows (principal and interest) reckoned based on the current BPLR +0.50% and the present value of future cash flows (principal and interest) based on rate charged as per the restructuring package). In the case of working capital facilities, the diminution in the fair value of the cash credit /overdraft component may be computed as indicated above, reckoning the higher of the outstanding amount or the limit sanctioned as the principal amount and taking the tenor of the advance as one year. The term premium in the discount factor would be BPLR+0.50%. The fair value of FITL and WCTL would also be computed as above. The diminution in the fair value may be re-computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account, so as to capture the changes in the fair value on account of changes in BPLR, term premium and the credit category of the borrower. Consequently, the bank may provide for the shortfall in provision or reverse the amount of excess provision held in the distinct account. For rural branches and those branches where aggregate advance of the branch is Rs.100 Cr and less, as an alternative to the methodology prescribed above for computing the amount of diminution in the fair value, the branches may notionally compute the amount of diminution in the fair value and providing therefore, at five percent of the total exposure, in respect of all restructured accounts where the total dues are less than rupees One crore till the financial year ending March 2011. The total provisions required against an account (normal provisions plus provisions in lieu of diminution in the fair value of the advance) are capped at 100% of the outstanding debt amount.

10. PROPOSED DISCOUNT RATE FOR CALCULATING PRESENT VALUE:

For Standard Assets : PLR+0.50% For all NPA accounts: PLR

11. PRUDENTIAL NORMS FOR CONVERSION OF PRINCIPAL INTO DEBT/EQUITY:

Asset classification norms

A part of the outstanding principal amount can be converted into debt or equity instruments as part of restructuring. The debt/equity instruments so created will be classified in the same asset classification category in which the restructured advance has been classified. Further movement in the asset classification of these instruments would also be determined based on the subsequent asset classification of the restructured advance. Income recognition norms:

Standard Accounts: In the case of restructured accounts classified as standard, the income, if any generated by these instruments may be recognised on accrual basis. Non- Performing Accounts: In the case of restructured accounts classified as nonperforming assets, the income, if any, generated by these instruments may be recognised only on cash basis.

PRUDENTIAL NORMS FOR CONVERSION OF UNPAID INTEREST INTO FUNDED INTEREST TERM LOAN (FITL), DEBT OR EQUITY INSTRUMENTS: Asset classification norms The FITL/debt or equity instrument created by conversion of unpaid interest will be classified in the same asset classification category in which the restructured advance has been classified. Further movement in the asset classification of FITL/ debt or equity instruments would also be determined based on the subsequent asset classification of the restructured advance. Income recognition norms The income, if any, generated may be recognised on accrual basis, if these instruments are classified as standard, and on cash basis in the cases where these have been classified as a non-performing asset. The unrealised income represented by FITL/Debt or equity instrument should have a corresponding credit in an account styled as "Sundry Credit Account (Interest Capitalization)". Only on repayment in case of FITL or sale/redemption proceeds of the debt/equity instruments, the amount received will be recognized in the P&L Account, while simultaneously reducing the balance in the "Sundry Creditors Account (Interest Capitalization)".

12. RIGHT TO RECOMPENSE:

In regard to concessions and relief made available to the units a clause should be added whereby when the units turned the corner and revival is successfully completed the sacrifices undertaken by the Bank should be recouped from the Company, out of their future profits of the cash accrual.

13. UP GRADATION OF RESTRUCTURED ACCOUNT:

The Sub-Standard / Doubtful accounts, which have been subjected to restructuring, whether in respect of principle installment or interest, by whatever modality, would be eligible to be upgraded to the standard category after the specified period, i.e. a period of one year after the date when first payment of interest or of principal, whichever is

earlier, falls due under the rescheduled terms, subject to satisfactory performance during the period.

14. RESTRUCTURING OF SME ADVANCES IN CASE OF CONSORTIUM /MULTIPLE BANKING ARRANGEMENTS

In case of eligible SMEs, which are under consortium/multiple banking arrangements, the bank with the maximum outstanding may work out the restructuring package, along with the bank having the second largest share.

15. MONITORING OF STATUS

The Rehabilitation department will review the progress in rehabilitation and restructuring of SME accounts on a quarterly basis. The Zonal Offices are required to submit quarterly statement in Appendix-(1) to Head Office with details of restructuring of SMEs as per enclosed Performa within 15 days from the close of the respective quarter.

16. DISCLOSURES
Bank would also disclose in their published annual Balance Sheets, under "Notes on Accounts", information relating to number and amount of advances restructured, and the amount of diminution in the fair value of the restructured advances in Appendix-(1) The information would be required for advances restructured under CDR Mechanism, SME Debt Restructuring Mechanism and other categories separately.

17. ILLUSTRATIONS
A few illustrations on the asset classification of restructured account are given in Appendix-(3) Branches/offices are advised to promptly act in terms of aforesaid guidelines in proper perspective for easing difficulties being faced by the Micro, Small and Medium Enterprises. Appendix -(2) Clarifications of the Terminologies used

Advances: The term Advances will mean all kinds of credit facilities including cash credit, overdrafts, term loans, bills discounted/purchased, factored receivables, etc. and investments other than that in the nature of equity. Fully secured: When the amounts due to a bank (present value of principal and interest receivable as per restructured loan terms) are fully covered by the value of security, duly charged in its favour in respect of those dues, the bank's dues are considered to be fully secured. While assessing the realisable value of security, primary as well as collateral securities would be reckoned, provided such securities are tangible securities and are not in intangible form like guarantee etc., of the promoter / others. However, for this purpose the bank guarantees, State Government Guarantees and Central Government Guarantees will be treated on par with tangible

security.

Restructured accounts: A restructured account is one where the bank, for economic or legal reasons relating to the borrowers financial difficulty, grants to the borrower concessions that the bank would not otherwise consider. Restructuring would normally involve modification of terms of the advances/ securities, which would generally include, among others, alteration of repayment period/ repayable amount/ the amount of instalments/ rate of interest(due to reasons other than competitive reasons). Repeatedly restructured accounts: When a bank restructures an account a second (or more) time(s), the account will be considered as a repeatedly restructured account. However, if the second restructuring takes place after the period upto which the concessions were extended under the terms of the first restructuring, that account shall not be reckoned as a repeatedly restructured account. Specified Period: Specified Period means a period of one year from the date when the first payment of interest or installment of principal falls due under the terms of restructuring package. Satisfactory performance: Satisfactory performance during the specified period means adherence to the following conditions during that period. Non-agricultural cash credit accounts : In the case of non-agricultural cash credit accounts, the account should not be out of order any time during the specified period, for a duration of more than 90 days. In addition, there should not be any overdues at the end of the specified period. Non-agricultural term loan accounts : In the case of non-agricultural term loan accounts, no payment should remain overdue for a period of more than 90 days. In addition there should not be any overdues at the end of the specified period. All agricultural accounts: In the case of agricultural accounts, at the end of the specified period the account should be regular.
APPENDIX-(1)

Particulars of Accounts Restructured (Rs. in crore) CDR Mechanis m SME Debt Restructuring O/SRs.1.0 O/S belowRs.1. 0 Cr & above 00 Cr Standard advances restructur No. of Borrowers Amount Others

O/SRs.1.0 O/S belowRs.1. 0 Cr & above 00 Cr

ed

outstandi ng Sacrifice (diminutio n in the fair value)

Sub standard advances restructur ed

No. of Borrowers Amount outstandi ng Sacrifice ( diminutio n in the fair value)

Doubtful advances restructur ed

No. of Borrowers Amount outstandi ng Sacrifice ( diminutio n in the fair value)

TOTAL

No. of Borrowers Amount outstandi ng Sacrifice (diminutio n in the fair value)

APPENDIX-(3) Asset Classification of Restructured Accounts under the Guidelines Particulars I Assumed due date of payment Assumed date of restructuring Case1 31.01.2007 Case2 31.01.2007 Case3 Case4

31.03.2007

31.03.2007

31.03.2007

31.03.2007

Period of 2 months delinquency as on the date of

2 months

18 months

18 months

restructuring Asset Classification (AC) before restructuring Date of NPA II 'Standard' 'Standard' 'Doubtful less than one year' 31.12.05 (Assumed) Eligible for special regulatory treatment 'Doubtful less than one year' 31.12.05 (Assumed) Not eligible for special regulatory treatment 'Doubtful less than one year'

NA

NA

Asset classification (AC) on restructuring Assumed status of the borrower AC after restructuring Eligible for special regulatory treatment 'Standard' Not eligible for special regulatory treatment

Downgraded to 'Doubtful 'Sub- standard' less than w.e.f 31.03.07 one year' (i.e., on the date of restructuring) 31.12.07 31.12.07

Assumed first payment due under the revised terms A

31.12.07

31.12.07

III Asset classification after restructuring The account performs satisfactorily as per restructured terms No change (i.e., remains 'Standard') 'Doubtful - less than one year' w.e.f. 31.03.08 (i.e. one year after classification as 'Substandard') No change (i.e., remains 'Doubtful less than one year') 'Doubtful one to three years' w.e.f. 31.12.07 (i.e., one year after classification as 'Doubtful less than one year') Upgraded to 'Standard' category (a) AC during the specified one year period (i.e., from 31.12.07 to 31.12.08)

(b) AC after the specified one year period B

Continues in Upgraded to 'Standard' 'Standard' category category

Upgraded to 'Standard' category

If performance not satisfactory vis--vis restructured terms Treated as sub- standard w.e.f 30.4.2007 and downgraded to 'Doubtful less than one year' with effect from 'Doubtful less than one year' w.e.f. 31.03.08 (i.e. one year after classification 'Doubtful one to three years' w.e.f. 31.12.07 'Doubtful one to three years' w.e.f. 31.12.07 (i.e., one year after classification as 'Doubtful less than one year' (on

(a) AC during the specified one year period (in case the unsatisfactory performance is established before completion of one year period)

30.04.08. (b) AC after the Will migrate specified one to 'Doubtful year period, if the one to three unsatisfactory years' w.e.f. performance 30.04.09 continues and 'Doubtful more than three years' w.e.f. 30.04.2011. Will migrate to 'Doubtful one to three years' w.e.f 31.03.09 and 'Doubtful more than three years' w.e.f. 31.03.2011. Will migrate to 'Doubtful - more than three years' w.e.f 31.12.09

31.12.06) Will migrate further to 'Doubtful more than three years' w.e.f. 31.12.09