Personal guarantee must before loan restructuring: RBI

In cases where the restructuring package could not be implemented due to promoters' non-adherence to terms and conditions, the banks should exercise exit option at the earliest with a view to minimise the
losses

Mumbai: A Reserve Bank of India (RBI) panel has recommended banks should seek personal guarantee from promoters and adopt a "carrot-and-stick policy" while restructuring loans of corporates,
reports PTI.

"As stipulating personal guarantee will ensure promoters' skin in the game or commitment to the restructuring package, obtaining the personal guarantee of promoters be made a mandatory requirement in all cases of restructuring," the panel said in its report, on which it has invited comments of stakeholders by 21 August 2012.

The RBI had in January set up the panel to review the existing prudential guidelines on restructuring of advances by banks and financial institutions and suggest modifications taking into account the best international practices and accounting standards.

The panel, which is headed by RBI executive director B Mahapatra, said corporate guarantee should not be considered as a substitute for the promoters' personal guarantee.

In cases where the restructuring package could not be implemented due to promoters' non-adherence to terms and conditions, the banks should exercise exit option at the earliest with a view to minimise the
losses, the report said.

"The terms and conditions of restructuring should inherently contain the principle of 'carrot and stick', that is while restructuring being an incentive for viable accounts, it should also have disincentives
for non-adherence to the terms of restructuring and under-performance," it said.