The menace of restructured loans has hit Indian banks really hard. Also the onset of the asset quality problems could not have been more ill timed. Economic slowdown has already taken a toll on the demand for credit. Sustaining net interest margins (NIMs) is also a trait of a few players in the sector. During such times, having to write-off restructured loans is a direct threat on the profitability of banks. The central bank (RBI) is wary of the fact that too much restructuring could pose a serious systemic risk to the asset quality of Indian banking sector.

The RBI therefore has sought to keep banks' restructuring policies in tight leash. While banks have increasingly sought to restructure troubled corporate loans, the RBI is not in favour of liberal policies. It does not want banks to declare potential non-performing laons (NPAs) as 'restructured' ones. Hence under the RBI's new mandate, banks will have to seek personal guarantee from promoters before restructuring loans. This will ensure that there is no willful default in the case of restructured loans. Plus banks themselves have to set aside provisioning of 5% of the value of a newly restructured loan. This was 2% earlier. It seems the Kingfisher Airlines case has taught the central bank some tough lessons.