RBI revises Debt Recast Norms: Scheme for Sustainable Structuring of Stressed Assets' (S4A)

• The Reserve Bank of India (RBI) has revised the norms for banks to undertake debt restructuring if they feel the project is viable in the long run.
• The main aim of this is to “strengthen the lenders’ ability to deal with stressed assets and to put real assets back on track by providing an avenue for reworking financial structure of entities facing genuine difficulties.”

Highlights of scheme/norms:
The Reserve Bank will facilitate the resolution of large accounts which meets certain criteria. Those accounts facing severe financial difficulties might be put for restructuring or some write-down or larger provisions can be allowed. The paper describes resolution plans that can be implemented to service the debt. An Overseeing Committee (OC) will be formed by the Indian Banks’ Association (IBA) in consultation with the Reserve Bank for overseeing the stressed assets cases.
Eligible Accounts

• The paper mentions certain guidelines to choose accounts that will fall under this. Accounts that have commenced commercial operations. Projects in which institutional lenders have exposure of more than Rs 500 crore.

Sustainable Debt

• This scheme defines sustainable debt as that where the Joint Lenders Forum or consortium of financial institutions believes that the existing loan can be serviced or can be retained at the existing level.
• But, for this scheme, the sustainable debt cannot be less than 50 percent of current funded liabilities.
• RBI also states that resolution may involve the current promoter to continue holding her stake in the company or some new promoter can be brought via the structural debt restricting (SDR) or non-SDR route. However, sustainable structuring is not permissible where promoters’ malpractices or wrongdoings have been revealed under audit.
• Under the new scheme, banks will have to divide the borrower's debt into two parts - Part A and Part B. Part A will be the debt amount that can be serviced including any new funding that may be required within six months and non-funded credit facilities whereas the debt that cannot be serviced will be classified under Part B. Promoters will have to provide personal guarantee for sustainable part of the loan.

Resolution Plan

• No moratorium will be granted to unsustainable debt as well as no extension will be given for repayment of principal or interest amount.
• Part A of the loan will need to have the same amount of security cover as was prior to resolution.
• Part B debt, on the other hand, can be converted into redeemable cumulative or convertible preference shares. Banks will also have the option to convert the debt into optionally convertible debentures. For Part B, the report mentions guidelines for fair valuations.
• In case of equity, the share in the bank’s portfolio will be marked to market on daily or weekly basis.
• In case the shares are not listed on stock exchanges, they should be valued at the lowest using methods like discounted cash flow and break-up value.
• The bankers can obtain promoters’ personal guarantee for the sustainable part of the loan. In a situation where the resolution does not involve a change in promoter, the principle of proportionate loss sharing by promoters will stand.
• In such a case, existing shareholders will have to dilute their holdings.
• For the resolution plan to be passed, consent from 75 percent lenders by value and 50 percent lenders by numbers in JLF or consortium will be needed.
• Once the resolution plan is decided, it will go to the OC. Once the resolution plan is approved by OC, it will be binding on all lenders. However, lenders will have the option to exit JLF and correction action plan.

Analysis:

• Reserve Bank's new debt recast norms are credit positive for banks and will help in reducing the gross non-performing asset levels by 30-100 basis points after one year.
• This move is expected to give an impetus, especially for projects that are viable in the long term but strapped for cash and/or good management.
• This rule will benefit companies which are under severe stress and are highly leveraged.
• This scheme will attract those corporate who are not able to service their debt due to weak cash flow or are unable to raise fresh equity due to poor valuations. Under this scheme, corporate will have to pay interest only on the sustainable part, which will reduce their interest liability.
• The move is intended to help restore the flow of credit to crucial sectors such as infrastructure and iron and steel, among others, reduce the stress on corporate borrowers and stanch bad loans across banks.
• Banks will be allowed to rework stressed loans under the oversight of an external agency, thereby ensuring transparency while also protecting bankers from undue scrutiny by investigative agencies.
• Overall, this scheme will likely help only those banks which have good provisioning cover and adequate capital in the first place. For state-owned banks which suffer on both these counts, this might not be an option. So, the scheme might not be enough to free up capital and kick-start lending.

By: Vishal