Following a few grammatical alterations to the original text, the revised English version of the regulations for debt restructuring is presented below.
Date: 9 June 1998 (B.E. 2541)
Regulations for Debt Restructuring
2. Defining Troubled Debt Restructuring
3. Establishing a Formal Strategy
4. Debt Restructuring Procedures and Documentation
5. Accounting for Troubled Debt Restructuring
6. Debt Classifications and Loan Loss Provisions
Regulations for Debt Restructuring
The following regulations have been drawn up with the purpose of introducing a formal strategy which financial institutions can refer to when restructuring troubled debts. The strategy advocates that policies for debt restructuring must be clearly set out, and the relevant procedures, outlined. Institutions must provide adequate analyses and supporting documents following internationally accepted accounting standards with regards to their financial statements, debt classification, and loan loss provisioning.
Effective date: from 2 June 1998 (B.E. 2541)
1. The Objectives of Debt Restructuring
Debt restructuring should be carried out to maximise the creditor’s chances of getting repayment subject to the debtor’s ability to repay the loan, or in some other way improve on the conditions set out in the original contract to both parties. Restructuring should be carried out to help debtors who have difficulties in loan repayment due to the effects of an economic crisis but are expected to recover in future. Financial institutions should ensure that restructuring is not carried out with the objective of postponing or avoiding debt classification or provisioning requirements, nor the avoidance of stopping interest accruals.
2. Defining Troubled Debt Restructuring
With reference to these guidelines, the term troubled debt restructuring (TDR) refers to cases where the financial institution experiences losses from restructuring due to the following.
2.1 Where the financial institution in a troubled debt restructuring grants a concession that would not otherwise be considered to a debtor by reducing the interest rate, the principal and/or the accrued interest, or by extending the maturity of the loan. In addition, the concession or some modification of terms granted must have lowered the present value of expected future cash flows under the restructured contract such that this present value is less than the book value of the original loan resulting in a loss to the financial institution.
2.2 Troubled debt restructuring also includes cases where the
financial institution accepts a transfer of assets, equity interests, and/or the conversion of the borrower’s debt into equity (debt-equity swap) to be held by
the institution in full or partial settlement of the original loan where the market value of the assets and/or equity interests transferred is lower than the book value of the original loan resulting in a loss to the financial institution.
Note that troubled debt restructuring does not include cases where financial institutions may grant concessions by reducing the interest rate to reflect changes in market fundamentals in order to maintain the relationship with the debtor that can readily obtain funds from other sources at current market rates, or by granting a grace period whereby the debtor continues to pay interest at the same rate. In such cases, the debtor is expected to be able to repay the full amount of the loan (principal and interest), therefore this is not considered a troubled debt restructuring.
3. Establishing a Formal Strategy for Debt Restructuring
3.1 Financial institutions must establish a formal strategy for debt restructuring whereby the highest level of management should participate directly in formulating this strategy. The strategy must form part of the institution’s written credit (business) policy.
3.2 The strategy should cover every stage of the restructuring process from start to finish including clear time-bound objectives, the approach and methodology for evaluating and granting loans, measures for monitoring and reporting on performance against those objectives to ensure that the restructuring has been carried out correctly in terms of its objectives and its accounting principles.
3.3 From the onset, responsibility for restructuring, reporting, and monitoring must be clearly defined. There must be an action plan for every stage of the restructuring process. The individual in charge of executing the restructuring process should not be the loan officer who gave the loan. Instead it should be an independent party such as a specialised group of experienced debt restructuring officers. Throughout the debt restructuring process, the specialised group in charge (held accountable) must be empowered to act for the financial institution in coming to a new agreement with the debtor.
In cases where, directly or indirectly, the financial institution and the debtor are affiliated, such as where directly or indirectly the institution holds shares in the debtor’s business, or where the debtor is a subsidiary of the institution, or is an
enterprise in which the institution has managerial authority or monopolistic control over, there is a conflict of interest.
If there is a conflict of interest, a third party must be appointed to evaluate the debtor’s circumstances and ability to repay the loan in accordance with the new
contract proposed including the debtor’s projected future cash flows for present value estimations. As such, the third party must be a specialised entity with a license to act as a consultant in matters of finance, a management consultancy, or a large foreign corporation recognised in the industry.
In cases where the financial institution is affiliated with or has interests in the debtor due to its involvement in assisting the debtor solve its troubled debt difficulties, institutions are not required to use another financial institution or third party to evaluate the debtor’s financial status, the debtor’s repayment capacity, or his cash flows.
4. Debt Restructuring Procedures and Documentation
Financial institutions must draw up action plans and prepare the relevant documents in each stage of the debt restructuring.
4.1 Preliminary Analysis and Documentation
The following information and documents must be included to evaluate the restructuring of a loan agreement.
(1). Details of the cause of debtor’s credit difficulties and delayed payments
of the principal and/or interest.
(2). The extent of the problem or cause of the debtor’s credit difficulties,
the borrower’s financial risk, taking account of the borrower’s financial
statements, cash flow statements, and financial forecasts, as well as an
assessment of market conditions and other factors relevant to the
debtor’s business and financial prospects.
(3). The expectations or likelihood of full repayment (principal and interest)
under the original loan and under the restructured loan contracts.
Financial ratios must also be included to provide indicators of the
debtor’s financial status and his ability to repay the loan.
(4). An evaluation of the borrower’s management focusing on their
efficiency to ascertain if there is a need for an external expert’s help in
organisational restructuring - for example, the changing of shareholders,
directors, managing directors, or the managerial approach.
Where debtors are ordinary individuals, financial institutions should
require additional collateral or a reliable guarantor.
(5). The completeness and adequacy of the documents and loan criteria used
in the restructuring process.
(6). If applicable, the collateral valuation following the Bank of Thailand’s
(7). The methodological approach and assumptions used to project future
cash flows and calculate present values.
(8). The analyses, the conclusions, and the recommendations for the
modification of terms such as reducing the interest rate, reducing the
principal, reducing the accrued interest, and extending the repayment
Note that the terms and conditions in the modification of terms must
take account of the economic life of the debtor’s business project(s).
Modification of terms must be within the debtor’s repayment capacity
such that the debtor is able to service the loan to its maturity.
(9). A revised amortisation schedule reflecting the modified terms which is
within the debtor’s ability to repay.
(10). Details and any remarks regarding the terms and conditions of the loan
including any financial covenants in the loan contract, for example, with
regard to capital write-downs, recapitalisations, or where financial
institutions specify the right to increase interest rates in the future in line
with the debtor’s capacity to repay the loan (should circumstances
(11). Legally enforcable contract and relevant documents must be prepared
(12). In cases where financial institutions grant additional loans to debtors
with impaired loans, institutions must clearly state the purpose and use
for which the additional loan(s) is intended. There must be no
implication that the additional loan is intended for servicing an existing
4.2 Follow-up Procedures and Documentation
Financial institutions must have follow-up procedures to monitor restructured loans which are in accordance with the regulations set out. This is to ascertain whether debtors are able to repay their debts as agreed in their revised contracts.
(1). Progress reports must be prepared monthly by the designated officer
detailing the latest developments in the firm, current action plans, and
the likelihood of full repayment.
(2). Financial institutions must require debtors to provide them with
financial statements, and key financial ratios in order that they may
continuously monitor the debtor’s business and financial status. Debtors
should also report the effects of the measures they undertake as part of
the restructuring process such as capital write-downs, recapitalisations,
and the withholding of dividends.
(3). Financial institutions must set out guidelines for actions to be taken if
debtors have further difficulties with repayment after restructuring.
5. Accounting for Troubled Debt Restructuring
5.1 The following accounting procedures are effective immediately for corporate loans with book values (including accrued interests) of 50 million baht and higher, and for corporate loans with book values of 20 million baht and higher, the accounting regulations are effective from the 1 January 2001 (B.E. 2544).
(1). Where concessions have been granted to the debtor, troubled debt restructuring requires that financial institutions calculate the new net book carrying value of the restructured loan (including any overdue or accrued interest) and hence the loss from restructuring using the first applicable method ranked by preference of priority as follows:
(a). The present value of expected future cash flows according to the
restructured contract using the discount rate detailed in section 5.1(4); (b). The market value of the restructured loan, if there is a market for such
debts and the market price is known, for example, the auction price
obtained by the Financial Sector Restructuring Authority; or
(c). The market value of the collateral (appraised following Bank of
Thailand collateral valuation and appraisal regulations) under the
restructured contract if the loan is collateral dependent.
If the new net book carrying value of the restructured loan as calculated using one the above methods is less than the book value of the original loan, the financial institution must recognise the amount in its profit and loss statement in that accounting period, and determine the appropriate loan loss provisions. Exempted from this requirement, are loans restructured prior to the end of 2000 (B.E. 2543) whose provisioning requirements are detailed in section 6.2.
(2). In cases where the financial institution accepts a transfer of assets, equity instruments, debt instruments and/or the conversion of the borrower’s debt into equity (debt-equity swaps) in full settlement of the debt,
financial institutions must deduct the market value of the assets and equity interests transferred from the book value of the loan, and write off the difference as a loss.
In cases where the creditor accepts a transfer of assets, equity instruments, debt instruments and/or the conversion of the borrower’s debt into equity (debt-equity swaps) in partial settlement of the debt with a modification of terms for the remaining debt, financial institutions must deduct the market value of the assets and equity interests transferred from the book value of the loan and account for the remainder of the debt following the regulations in section 5.1(1).
(3). Financial institutions must base estimates of projected future cash flows for restructured loans on reasonable assumptions with substantiable evidence. All relevant factors affecting the debtor’s cash flows should be
considered to obtain the most realistic estimate possible.
As such, financial institutions must not include uncertain cash flows in the above estimate, for example, any cash flows resulting from increases in the principal or the interest rate, or from exercising convertible debentures should the debtor’s circumstances improve.
(4). When computing the present value of loans on restructuring, financial institutions must use the effective interest rate from the original loan contract as the discount rate.
(a). In cases where the contractual interest of the original loan is a variable rate, financial institutions may use a rate reflective of the original (variable) rate as the discount rate throughout the debt restructuring period. Where practically
expedient however, financial institutions may choose to fix the original variable rate, either on the date of restructure or on the date of impairment classification, and use this as the discount rate throughout the debt restructuring period. Financial institutions are required, however, to consistently apply the chosen method throughout the restructuring period, to all loans which fit this category.
(b). In cases where the original loan was not properly structured, for example if a loan with a short term structure was granted where a longer term structure would have been more appropriate, the financial institution may use the discount factor that would have applied at that time to the loan had it been properly structured. This option is conditional on the financial institution demonstrating that the rate proposed is the rate applicable to such a loan were it properly structured, at the time the original loan was granted. Note that institutions must apply the chosen method consistently throughout the life of the restructured loan (for methodological consistency).
(5). Financial institutions must review the restructured loans on a quarterly basis following the restructure. If there is a significant difference in the amount or timing of the loan’s realised cash flows, or in the floating interest
rate, or in the value of the collateral from the projected values, financial institutions must recalculate the impairment loss (as detailed in section 5.1(1) –
(4)) and make the required provisions. (Note that the book value of the restructured loan must never exceed the book value of the original loan, and the net carrying amount of the loan shall at no time exceed the recorded investment in the loan.)
To provide financial institutions with an adjustment period in line with the phase-in of the provisioning requirements up to the end of the year 2000 (B.E. 2543), financial institutions may use the collateral valuation method instead of the present value approach to calculate the loss from restructuring.
5.2 For loans with book values under the threshold detailed in section 5.1, financial institutions may apply accounting procedures other than those outlined in section 5.1, however, institutions must outline and incorporate these procedures in their troubled debt restructuring policies.
5.3 For consumer loans which are to be restructured, financial institutions may estimate losses on restructuring on a group-by-group basis using a statistical method, or on a loan-by-loan basis in accordance with the TDR regulations detailed in sections 5.1.
6. Debt Classifications and Loan Loss Provisions after Restructuring
6.1 After restructuring, financial institutions must follow the conditions detailed below.
(1). Institutions must account for interest payments on restructured loans
(includes other payments expected in the future) on a cash basis (not an
(2). Institutions will reclassify restructured loans as follows on the date of
; If the original loan was classified as “doubtful” or “loss”,
institutions may reclassify the loan as “substandard”;
; If the original loan was classified as “substandard” or “special
mention” the classifications remain unchanged.
(3). After the debtor has serviced and paid the agreed interest on the restructured loan for a minimum of three months or has made at least three repayments (agreed interest and/or principal) on the restructured loan (whichever period is longer), the financial institution may account for repayments on an accrual basis, and re-classify the loan as normal.
(4). In cases where financial institutions have also granted additional loans (or has committed to additional debt interests) to aid the financial recovery of debtors with impaired loans, if the additional loans were granted in accordance with the procedures set out in the documents BOT.X.( C )1399/2541 and 1400/2541 dated April 16, 2541 on Granting Additional Loans to Debtors with Impaired Loans, then the additional loans given need not be classified as impaired.
6.2 Provisioning for Losses on Restructuring
(1). In line with the phase-in of the provisions required for debt classifications, financial institutions may phase-in the provisions required for losses on restructuring up to 31 December 2000 (B.E. 2543). Institutions are required to make the following minimum level of provisions for losses on restructuring:
nd; 20% of required provisions by the 2 accounting period 1998 (B.E. 2541);
st; 40% of required provisions by the 1 accounting period 1999 (B.E. 2542); nd; 60% of required provisions by the 2 accounting period 1999 (B.E. 2542); st; 80% of required provisions by the 1 accounting period 2000 (B.E. 2543); nd; 100% of required provisions by the 2 accounting period 2000 (B.E. 2543).
(2). In cases where the length of the phase-in period detailed above is longer than the length of the loan contract, financial institutions may phase-in impairment loss provisions over the length of the loan contract only.
(3). Post-restructure, during the test period where the loan has not yet been classified as normal (section 6.1(3)), as a minimum requirement, the financial institution must provide loan loss provisions equal to the impairment loss or the debt classification, whichever requires the greater amount of provisions. Note that after the loan has been re-classified as normal, the financial institution must continue to make the required provisions for the impairment loss and the normal debt classification.
(4). In cases where financial institutions have maintained provisions over the amount required in each accounting period, financial institutions may not reverse back the portion over-provisioned from the account until 100 percent of all required provisions for debts and assets (without phase-in) have been provided for.
6.3 In cases where debtors cannot meet the obligations of the restructured contract, financial institutions must immediately re-classify the loan as impaired following the regulations issued by the Bank of Thailand counting the time overdued from the last payment date in the original contract and make the appropriate provisions. Note that if the quality of the loan has worsened during this period, the financial institution must re-classify the loan according to its quality and actual value.
7. BOT Examiners
Examiners from the BOT are empowered to change existing debt
classifications, make provisioning requirements, stop the use of accruals, and demand the reversal of accrued income in any of the following cases:
(1). Where debt restructuring was carried out with the objective of
postponing debt classification and loan loss provisioning, or to avoid