 "Real estate companies may find it hard to claim relief under S4A")
The Reserve Bank of India's Scheme for Sustainable Structuring of Stressed Assets may not prove to be a panacea for all ills plaguing banks and their corporate clients, as was initially thought.
Instead, the new tool to provide relief to banks and companies weighed down by debt is only an extension of the existing scheme, and has been formulated to help a handful of companies and their well-meaning promoters who are in dire need of a lifeline, a closer look of the scheme shows. As such, it is unlikely that the scheme can be invoked for many companies.
For a start, the main contention of the new loan structuring scheme, or S4A, is that the company should already be operational, and should have a predictable cash flow to cover half the debt owed to banks.
This portion of the debt, termed as 'sustainable' by the central bank, is something most companies in stress do not have.
Bankers say not many qualify. "Our estimate suggests not even 20 per cent of the stressed companies qualify under this scheme," says R K Bansal, executive director of IDBI Bank.
According to Bansal, only a few steel companies and some EPC (engineering procurement companies) make the cut as of now. In his view, S4A should not be treated as something of a game changer.
According to RBI's Financial Stability Report, published in June, the percentage of "leveraged weak" companies was relatively higher in the case of electricity, construction, iron and steel, real estate, textiles and paper industries. The weakness was also significant for privately-run aviation and cement companies.
However, not many of them can claim relief under S4A.
| LIFTING THE DEBT BURDEN |
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Evaluating debt
The scheme allows companies to split their liabilities into sustainable, which can be serviced with their existing cash flows, and unsustainable, which can be restructured. Banks can convert the unsustainable debt into equity or a convertible security, subject to a few riders.
The unsustainable part, for example, should not be more than 50 per cent of the total debt, and provisions should be made at 40 per cent of the unsustainable debt or 20 per cent of the total debt, whichever is higher. Normally, banks incur 15 per cent provision for restructured loans in the first year.
Also, before companies are considered for S4A, an independent agency will conduct a techno-economic viability study to gauge the amount of the sustainable debt, and any resolution plan should be agreed upon by a minimum of 75 per cent of the lenders by value and 50 per cent by number in the consortium.
As part of the resolution mechanism, the RBI guidelines say, the unsustainable portion of the debt should be converted into equity, and banks should not grant any fresh moratorium on interest or principal repayment, or reduction of interest rate for servicing of the sustainable debt portion.
In the process, both the promoters and the banks involved will have to take an equal haircut. If there is no change in the existing management, the banks can also convert a portion of the unsustainable debt into coupon-yielding debt instruments.
The guidelines say the equity shares thus acquired should be marked-to-market on a daily, or at least on a weekly basis for listed companies. If the company is not listed, banks should take the lowest value based on rules outlined by the central bank.
The upside for the banks would primarily be their equity holdings if the restructured entity turns around.
According to analysts, the new scheme is better than the Strategic Debt Restructuring scheme launched by the RBI earlier because it allows company promoters to stay in the business rather than making banks take over the business without having the necessary expertise.
"This step coupled with the proposed non-performing asset pricing committee for public sector banks should help speed-up stressed asset resolutions, but execution will remain the key," says Nomura in a research report.
Checks and balances
To ensure bankers are not held liable for bets gone wrong, there will be an overseeing committee which will review the processes involved in the preparation of resolution plans for reasonableness and adherence to rules.
The committee, which will be selected by the Indian Banks' Association (IBA), will be advisory in nature and it won't be mandatory for banks to listen to its recommendations. However, it is unlikely that banks will ignore the committee's signals.
Bankers have on many occasions expressed their displeasure about being hounded for wrong credit decisions even after their retirement. Recently, central bank officers, bankers, bank board bureau and investigative agencies met in Mumbai at the RBI headquarters to discuss this issue. The overseeing committee is likely to take the issues discussed at the meeting into consideration.
According to an IBA official, the panel will not pass a judgment on restructuring projects, unless banks have specifically asked for it. Rather, the panel will look into the legalities and procedures followed before the restructuring process.
"Our interaction with bankers earlier suggested that banks, particularly public sector banks, have been very reluctant in taking steps to resolve bad loans fearing harassment for decisions gone wrong," says Antique Stock Broking in a report.
At the end of fiscal 2016, Bank of Baroda's 'watch list,' or doubtful assets portfolio, was at Rs 15,886 crore, or 4.1 per cent of the loan book. ICICI's was at Rs 44,065 crore, or 10.1 per cent of the total loan, SBI's at Rs 31,353 crore, or 2.1 per cent of the total assets, and Axis Bank's at Rs 22,628 crore, or 7 per cent of the total loans.
So far, lenders have agreed to restructure the debt of Hindustan Construction and are likely to consider Electrosteel, Bhushan Steel and Visa Steel for debt recast under the new scheme. The combined debt burden of these three steel companies is around Rs 54,400 crore, according to data from Capitaline.
Bankers have sent their proposals to experts for a techno-economic viability report.
