MUMBAI: The Reserve Bank of India (RBI) on Monday relaxed guidelines for restructuring of large stressed assets by lenders, in a move that would allow banks to more effectively manage bad loans on their books.
The new norms, which applies to companies with debt of over Rs 500 crore and to projects that are already in operation, will allow promoters to hold majority stakes in companies even after restructuring, which was not allowed by the strategic debt restructuring (SDR) mechanism set up by the central bank last year.
There will be no extension for repayment of principal or interest amount, or any moratorium for unsustainable debt. However, the Scheme for Sustainable Structuring of Stressed Assets (S4A) will determine the sustainable debt level for a stressed borrower, and allow banks to convert the unsustainable part of the debt on a company’s books to equity/ quasi-equity instruments. For banks, it will mean that accounts, which were on the brink of turning into bad loans, will now have a chance of revival. For companies, since the debt level will come down, it will make it easier for them to turn around businesses.
Projects in the power sector are not likely to come under this scheme, since most of them are yet to begin operations.
The resolution plan will be prepared by professional agencies, while an overseeing committee, set up by the Indian Banks Association, in consultation with the RBI, will independently review the processes involved in preparation of the resolution plan.
“Banks were earlier wary of taking hits and the new guidelines provide legitimacy to banks to do that,” said Abizer Diwanji, partner and national leader, financial services, EY. “Up to 50% of the debt is acceptable to let go and banks can take up to 50% provision as long as 50% of it is sustainable debt.”
Banks are saddled with Rs 6 lakh crore in bad loans, and RBI governor Raghuram Rajan has set a deadline of March 2017 to clean up balance sheets.
“This is a fine balance between provisions and forgoing debt,” said RK Bansal, executive director, IDBI Bank. “Basically now, banks will need to work out the viability of what debt is sustainable and unsustainable and provide for that which is not, and restructure which is sustainable. There is also an upside in taking equity of the unsustainable debt.”
The only flip side is that banks will now try to fit their debt into the 50% sustainable model, and hence, effective monitoring must be maintained, Bansal added.
