Restructured Loan, Reshceduled Loan, Loan and Loan Loss Provisioning, Standard Assets

Banks are sensitive about provisioning on restructured and sticky loans as it impacts their bottom lines.

Since many airlines, saddled with debt and operating in a fiercely competitive market, have run into difficulty due to costly oil and weaker rupee, the RBI has allowed lenders to treat the restructured loans to these companies as 'standard assets'. This worked as an incentive for banks, which have to commit lesser capital against standard assets compared to other categories of loans such as 'substandard or 'loss' assets.

Under the proposal, SBI will have to make a provision of Rs 37 crore on its loan exposure of Rs 1,100 crore while other banks with exposures of Rs 1,000-1,200 crore will have to provide as much as Rs 500-700 crore. Most banks questioned the provisioning criteria when they met in Delhi a fortnight ago to discuss the matter.

"SBI Caps told banks that SBI has the first right over the securities of Air India and since it is willing to relinquish its first right over the assets and create a common pool of securities, the bank is compensated with lower provisioning. We don't buy this argument," a banker, who was present in the meeting, told ET.

What is a restructured loan???
New loan that replaces the outstanding balance on an older loan, and is paid over a longer period, usually with a lower installment amount. Loans are commonly rescheduled to accommodate a borrower in financial difficulty and, thus, to avoid a default. Also called rescheduled loan.

What is a rescheduled loan???
A bank loan which was restructured, usually by lengthening the maturity, in order to avoid default.

What is a provisioning of loan by Banks???
A non-cash expense for banks to account for future losses on loan defaults. Banks assume that a certain percentage of loans will default or become slow-paying. Banks enter a percentage as an expense when calculating their pre-tax incomes. This guarantees a bank's solvency and capitalization if and when the defaults occur. The loan loss provision allocated each year increases with the riskiness of the loans a given bank makes. A bank making a small number of risky loans will have a low loan loss provision compared to a bank taking higher risks.

Loan Loss Provision???
An expense set aside as an allowance for bad loans (customer defaults, or terms of a loan have to be renegotiated, etc).

Standard Assets???
To understand the standard assets, I would suggest you to read through the NPAs (Non Performing Assests).