RBI's new debt restructuring scheme may not be a game changer

The Reserve Bank of India’s (RBI) new measure to tackle the pile of mounting bad loans in the banking system is not expected to be a game changer, say many analysts and bankers.

They say the new norms (Scheme for Sustainable Structuring of Stressed Assets) address some of the issues faced in earlier strategic debt restructuring (SDR), where banks were unable to sell off the assets after taking management control of a company and converting debt into equity.

However, this scheme also raises doubts on evergreening of loans by banks, the practice of giving a new loan to repay an old one.

Rating agency Icra said the move might help the reducing the reported level of gross non-performing loans by 30-100 basis points from the current 7.7 per cent as on end-March, after a lag of one year (following satisfactory performance of the sustainable debt portion). 

At the start, loans worth Rs 75,000-80,000 crore might be taken up for deep recast under new norms, analysts said.
The challenge pointed out by bankers is that this scheme is only for projects that are operational. So, several projects in the power and the infrastructure space will be out.

Under the new scheme, banks will have to divide the existing debt of a company into ‘sustainable’ (the share which can be serviced by the company even if cash flow remains the same as now) and ‘unsustainable’. An independent oversight agency will ascertain the economic viability of a project and the resolution plan.

Senior officials with the Indian Banks’ Association said they’d work at fleshing out the working arrangement. “RBI will have a dominant role in the entire process. Nothing will happen without its blessings,” said one.

The resolution plan needs to ensure that the unsustainable portion of the debt should be converted into equity/redeemable cumulative optionally convertible preference shares. The scheme also limits lenders from granting any fresh moratorium on interest or principal repayment or reduction of interest rate for servicing of the sustainable debt portion.

This distinction between sustainable and unsustainable debt might also lead to problems and can cause limitations, believe analysts. “The success of the scheme will crucially depend on the ability of banks to segregate stressed loans and the willingness of banks to absorb haircuts on the unsustainable portion,” said Dhananjay Sinha, head of institutional research, Emkay Global Financial Services.

Unlike the earlier norms, here the promoters are allowed to have management control. “Existing promoters of large borrower companies are allowed to continue if they give up their stakes in the same proportion as that of Part B (unsustainable portion) to total dues. This will create a moral hazard as equity writeoff always precedes debt. The guidelines should benefit companies which are under severe stress and have very high leverage,” said a research report by domestic broking house Religare.

However, bankers do expect a smoother resolution with this as compared to the earlier SDR norms. However, its impact will have to be tested over period of time to see how effective this tool had been in tackling bad loans problems being faced by the banking industry.

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DEEP SURGERY & NOT BAND AID
The Reserve Bank of India’s efforts to give banks more power to recover dues started in right earnest from January 2014, months after Raghuram Rajan became the governor of the central bank. When the strategic debt restructuring scheme did not serve its intended purpose, RBI, on Monday, allowed banks to do deep restructuring, without altering the management

• Jan 30, 2014: RBI releases framework for revitalising distressed assets in the economy
• Feb 26, 2014: Introduces Joint Lenders’ Forum (JLF), special mention account and corrective action plan for quick resolution of stressed assets
• Feb 26, 2014: Prods banks to sell assets to securitisation companies and asset reconstruction companies
• July 15, 2014: RBI launches 5/25 scheme that allowed banks to reset and roll over project loans after every five years and match the repayment schedule with the cash flow of the company
• Feb 2015: Union Budget proposes setting up of the National Investment and Infrastructure Fund that would invest in distressed projects
• April 2015: RBI ends forbearance, starts asset quality review
• April 23, 2015: RBI tightens wilful defaulter norm, says only nominee and independent directors who are not whole-time board members of a ‘wilful defaulter’ firm would be excluded from the list of wilful defaulters
• June 8, 2015: RBI introduces strategic debt restructuring scheme, which allows banks to convert a defaulting company’s debt into equity and take majority control. The scheme gave banks power to change management
• Sept 24, 2015: Joint Lenders’ Forum Empowered Group (JLF–EG)
  RBI gives more power to lead banks and makes State Bank of India and ICICI Bank as permanent members of JLF-EG
• Dec 2, 2015: RBI tells banks to clean their balance sheets by FY17. Banks report huge losses and spike in bad debts in subsequent two quarters
• May 14, 2016:  Government moves Lok Sabha to amend Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, and the Debt Recovery Tribunal (DRT) Act
• June 13, 2016: RBI introduces scheme for sustainable structuring of stressed assets, which allows banks to do deep restructuring of stressed projects without changing the management

Compiled by Anup Roy