Deccan Fabrics: Sub-Standard Classification and a Restructuring Request

Date count. The term loan instalment fell due on 5 November and the cash credit interest on 30 November; no credit has come in since 14 November. The cash credit account is also 'out of order' because there have been no credits for the stipulated period and the outstanding has no fresh DP support.

SMA path

• SMA-0: 1-30 days overdue (from early December)
• SMA-1: 31-60 days (early January)
• SMA-2: 61-90 days (early February)
• NPA: beyond 90 days, i.e. from about 28 February

So the account was already an NPA when the 31 March balance sheet was struck - at least 30 days old as an NPA but well under 12 months.

Classification as on 31 March: sub-standard (NPA for a period not exceeding 12 months).

Provision

• Secured realisable value = 1.30 + 0.40 = Rs 1.70 crore
• Unsecured exposure = 2.10 - 1.70 = Rs 0.40 crore
• On the secured portion: 15% x 1.70 = Rs 25.50 lakh
• On the unsecured portion: 25% x 0.40 = Rs 10.00 lakh
• Total provision = Rs 35.50 lakh

The Rs 90 lakh receivable from the insolvent buyer is not security; its realisable value depends on the resolution plan and any admitted claim. If the stock and debtors valuation is not supported by a current stock statement and audit, the secured portion should be marked down, which increases the provision.

No. Asset classification follows the record of repayment, not the presence of a restructuring proposal. Once an account is an NPA, restructuring cannot restore standard status on the day of implementation, and a borrower's request that other banks not be affected is not a permissible basis for classification. Misclassifying an NPA to protect a borrower's other limits would also amount to incorrect regulatory reporting.

What restructuring actually does:

• Classification continues as NPA (here, sub-standard) on implementation of a resolution plan. Upgradation is permitted only after satisfactory performance under the plan - typically a defined period of uninterrupted servicing at the restructured terms, per the bank's board-approved policy framed under RBI's Prudential Framework for Resolution of Stressed Assets. The account would then be flagged as 'restructured' in the credit information report until the required performance period is completed.
• Diminution must be provided upfront. The bank must compute the NPV loss arising from the moratorium and the 15% haircut and provide for the diminished value in the year of restructuring. With a 24-month moratorium and a haircut on a Rs 2.10 crore exposure, the NPV loss will be well above the existing Rs 35.50 lakh sub-standard provision.
• Additional finance for working capital sanctioned to keep the unit running during the resolution period may be treated as a standard asset for a limited period, as provided in the framework - this is a narrow carve-out, not an upgrade of the existing exposure.
• Reporting. The exposure is below Rs 5 crore, so it does not enter the CRILC reporting threshold; but SMA/NPA status must be reported correctly to the credit information companies, and the restructured flag must be carried.
• Timeline. The resolution plan must be implemented within the prescribed review-and-resolution timeline under the framework, failing which the bank must proceed to recovery action.

Approve only if the business is viable apart from the one-off buyer failure. The Rs 90 lakh exposure to an insolvent buyer explains the stress; the rest of the book must be shown to be performing. Obtain a fresh TEV/techno-economic assessment and file the claim in the CIRP within the timeline set by the resolution professional - any expected recovery from the insolvent buyer must be built into the resolution plan, not ignored.

Terms I would insist on:

• Promoter contribution upfront, in cash, not by revaluing assets or by adjusting group balances; a meaningful share of the haircut should be borne by the promoters before the bank takes any.
• Moratorium capped at 12 months, with interest serviced during the moratorium (no interest funding), and total repayment within 5-6 years.
• Haircut converted into an equity or quasi-equity instrument or an earn-out linked to revival, rather than a straight write-off.
• Escrow of receivables with all sale proceeds routed through the bank, and a covenant that the account is not allowed to go out of order for even 30 days post-restructuring.
• Additional security: extension of the charge to the promoters' personal residential property and an unconditional personal guarantee of all partners.
• Covenants: no dividend, no partner drawings above a cap, no new borrowing or guarantee without consent, no disposal of machinery.
• Monitoring: monthly stock and debtor statements, quarterly inspections, and a defined exit to SARFAESI if two consecutive instalments are missed.

Decline if: the buyer's insolvency is being used to mask chronic losses; the promoters refuse to bring cash or offer personal assets; the unit's EBITDA cannot cover even the restructured interest after the moratorium; or the promoters conceal the Rs 90 lakh claim position. In those cases, recall the advance and enforce the charge on stock, debtors and machinery.