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Indian Bank’s margins already under pressure due to the global economic hold up, the RBI has provided them a breather by revising the method of calculating the current value of restructured loans.

The Reserve Bank of India (RBI) has provided a rest to banks by revising the method of calculating the current value of restructured loans as banks' margins are under pressure due to the global economic slowdown.

The existing treatment compares the post-restructuring fair value of the loan with the book value. In a falling interest rate scenario, the difference is too low while in a rising interest rate the difference is too high, the RBI said.

As per the new formula, the corrosion in the fair value of the advance should be computed as the difference between the fair value of the loan before and after restructuring. The existing formula has resulted in higher provisioning due to rise in the rate of interest during the last few years. It has been decided to modify the formula for computing diminution in the fair value of restructured loan, the central bank said in a notification.

At present, while restructuring the loans, banks take into account the benchmark lending rate, Prime Lending Rate, which have been on a rise during the last few years, the RBI said. It further said that it is adding to the financial difficulties being fa ced by banks due to the current downturn. The proposed formula, according to the RBI, moderates the swing in the diminution of present value of loans with the interest rate cycle.