Ten bank stocks rose by 0.17% to 0.95% at 10:40 IST on BSE after the Reserve Bank of India announced that banks can undertake a strategic debt restructuring of a stressed assets by converting loan dues into equity shares.
The Reserve Bank of India (RBI) made the announcement after trading hours yesterday, 8 June 2015,
Meanwhile, the BSE Sensex was down 20.82 points, or 0.08%, to 26,502.27.
Among private sector banks, ICICI Bank (up 0.67%), Yes Bank (up 0.9%), Federal Bank (up 0.6%), Kotak Mahindra Bank (up 0.17%) and Axis Bank (up 0.92%), gained. HDFC Bank (down 0.13%) and IndusInd Bank (down 0.36%) declined.
Among PSU bank stocks, State Bank of India (SBI) (up 0.43%), Canara Bank (up 0.32%), Union Bank of India (up 0.95%), Bank of India (up 0.49%), and Punjab National Bank (up 0.51%) gained. Bank of Baroda declined 0.1%.
Indian Bank rose 0.14%. The bank after market hours yesterday, 8 June 2015, announced that it has reduced the base rate from 10.25% to 9.95% per annum and the benchmark prime lending rate by 30 basis points from 14.5% to 14.2% per annum with effect from 8 June 2015.
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The BSE Bankex had outperformed the market over the past one month till 8 June 2015, declining 1.71% compared with 2.15% decline in the Sensex. The index had however underperformed the market in past one quarter, dropping 11.49% as against Sensex's 9.94% fall.
The Reserve Bank of India (RBI) announced that banks can undertake a Strategic Debt Restructuring (SDR) of a stressed assets by converting loan dues into equity shares. SDR will provide banks with enhanced capabilities to initiate change of ownership in cases of restructuring of accounts where borrower companies are not able to come out of stress due to operational/managerial inefficiencies despite substantial sacrifices made by the lending banks, the RBI said. At the time of initial restructuring, the Joint Lenders' Forum (JLF) must incorporate, in the terms and conditions attached to the restructured loan/s agreed with the borrower, an option to convert the entire loan (including unpaid interest), or part thereof, into shares in the company in the event the borrower is not able to achieve the viability milestones and/or adhere to 'critical conditions' as stipulated in the restructuring package. This should be supported by necessary approvals/authorisations (including special resolution by the shareholders) from the borrower company, as required under extant laws/regulations, to enable the lenders to exercise the option effectively. Restructuring of loans without the required approvals/authorisations for SDR is not permitted. If the borrower is not able to achieve the viability milestones and/or adhere to the 'critical conditions' as stipulated in the restructuring package, the JLF must immediately review the account and examine whether the account will be viable by effecting a change in ownership. If found viable under such examination, the JLF may decide on whether to invoke the SDR, i.e. convert the whole or part of the loan and interest outstanding into equity shares in the borrower company, so as to acquire majority shareholding in the company.
In order to achieve the change in ownership, the lenders under the JLF should collectively become the majority shareholder by conversion of their dues from the borrower into equity, according to the RBI notification. However, the conversion by JLF lenders of their outstanding debt (principal as well as unpaid interest) into equity instruments shall be subject to the member banks' respective total holdings in shares of the company conforming to the statutory limit in terms of Section 19(2) of Banking Regulation Act, 1949. Post the conversion, all lenders under the JLF must collectively hold 51% or more of the equity shares issued by the company. The share price for such conversion of debt into equity will be determined as per a formula prescribed by the RBI.
Provisions of the SDR would also be applicable to the accounts which have been restructured before the date of this circular provided that the necessary enabling clauses are included in the agreement between the banks and borrower, the RBI said.
According to the RBI notification, JLF and lenders should divest their holdings in the equity of the company as soon as possible. On divestment of banks' holding in favour of a new promoter, the asset classification of the account may be upgraded to 'Standard'. However, the quantum of provision held by the bank against the said account as on the date of divestment, which shall not be less than what was held as at the 'reference date', shall not be reversed. At the time of divestment of their holdings to a 'new promoter', banks may refinance the existing debt of the company considering the changed risk profile of the company without treating the exercise as 'restructuring' subject to banks making provision for any diminution in fair value of the existing debt on account of the refinance. Banks may reverse the provision held against the said account only when all the outstanding loan/facilities in the account perform satisfactorily during the 'specified period', i.e. principal and interest on all facilities in the account are serviced as per terms of payment during that period. In case, however, satisfactory performance during the specified period is not evidenced, the asset classification of the restructured account would be governed by the extant IRAC norms as per the repayment schedule that existed as on the reference date, assuming that 'stand-still'/above upgrade in asset classification had not been given. However, in cases where the bank exits the account completely, i.e. no longer has any exposure to the borrower, the provision may be reversed/absorbed as on the date of exit.
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