[The following guest post is contributed by Harsh Loonker, who is a 4th year student at the Jindal Global Law School, Sonipat]
India’s central banking institution, the Reserve Bank of India (RBI), has issued guidelines on a Scheme for Sustainable Structuring of Stressed Assets. These guidelines would mark a significant shift in reactive measures undertaken by regulators to act in response to the increase in stressed assets in the banking and financial lending industry. The RBI has introduced this scheme in order to further strengthen the lenders’ ability to deal with stressed assets and to put real assets back on track by facilitating a rework of financial structures in entities facing genuine difficulties. This scheme envisages the determination of debt levels for a stressed borrower, and effectively bifurcates the outstanding debt into sustainable debt and equity instruments, which is expected to provide an upside on returns to lenders when the borrower’s business turns around. The Scheme is aimed at controlling and restructuring big-ticket accounts where the amount due is more than Rs. 500 crores. This post will look at some of the key provisions of the guidelines/scheme and the issues that need to be addressed by this regulatory framework.
According to RBI data, the stressed assets ratio, which includes non-performing assets (NPAs), of the banking sector, increased to 14.6% by the end of December 2015. This mark is against a 9.8% level that was noted towards the end of March 2012. It must be mentioned that state-run banks have the highest share in stressed loans. Their gross NPA, or bad loans, alone rose from Rs. 2.6 lakh crore in March of 2015 to an exorbitant Rs. 3.61 lakh crore in December of the same year. To better fight this rise in bad assets, the RBI has from time to time issued guidelines and norms over stressed assets intended for regulated lenders. Among efforts to revive borrowers, another restructuring scheme was issued last year called the Strategic Debt Restructuring Scheme (SDR). Complementary norms to this scheme called the Prudential Norms on Change in Ownership of Borrowing entities were also issued to address strategic change in ownership of the distressed business/companies or change in promoters of the borrower company.
Certain highlights and issued presented by this scheme
The scheme formulated by the RBI is an optional framework for structuring large distressed accounts. This scheme starts off by determining sustainable debt limits for the borrower facing financial distress. Then the scheme envisages bifurcation of the outstanding debt into sustainable debts on the one side and equity in the company or quasi-equity related instruments on the other. Already existing equity or security positions of lenders in the distressed company will not be affected by the scheme. The scheme lays out a detailed asset classification and provisioning of the same. In order to make sure the entire exercise is carried out in a prudent and transparent manner, the scheme envisages the plan for resolution to be prepared and implemented by credible professional agencies. A decision by the Joint lenders (JLF)/consortium of banks will be taken to resolve an account in issue. An overseeing committee will be formed and implementation will be made within 90 days.
In a nutshell, this scheme involves a substantial “write-down” of debt by dividing it into the above-mentioned categories. Earlier, lenders were able to co-ordinate deep financial restructuring with similar write-downs without being able to amend the bottom-line liability structure of the borrower facing stress. With the second category of equity and related instruments, banks have been given an incentive. Big-ticket lenders will now be able to structure and write down debts while offsetting the same with future payouts originating from owning equity in the borrower business. Market participants and stakeholders have requested such a scheme because this way companies under stress will be better able to deliver on their debt commitments without placing any moratorium on interest payments. As per the scheme, certain conditions are placed for an appropriate resolution plans, namely:
“a) There shall be no fresh moratorium granted on interest or principal repayments
b) There shall be not be any extension of repayments schedule or reduction in the interest rate for servicing, as compared to repayment schedule and interest rate prior to this resolution.”
The guidelines therefore do not allow for any change in the terms and condition of the loan in question. It must be mentioned that the entire scheme only supports projects/assets where commercial operations have commenced. Therefore, this scheme will not help lenders connected with major power projects, which are still under implementation, and facing financial difficulties. Further, only current cash flows connected with the asset are used as a basis while ascertaining sustainable debt. If unsustainable debt is more than cash flow, this scheme would be unviable.
This scheme is a welcome device for financial institutions to take curative measures in order to revive cases of stressed assets and to clear the books of accounts from bad loans. There are other measures available for lenders in addition to this scheme. Such as the ones available under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the corporate debt restructuring framework and the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. But it must be mentioned that these regulatory schemes are only directed towards big ticket lending and do not concern retail lending for which there is a huge want in the market. Further, discussions on setting up special funds to resurrect troubled investments through equity infusion are already underway such as the stressed assets equity fund (SAEF) and stressed assets lending fund (SALF). SAEF will be set up to invest in equity of stressed borrowers bringing in fresh infusion of cash and SALF will provide working capital infusions, or low interest bridge loans for borrowers facing funding constraints. These regulatory measures in concert will increase banking and lending confidence at a time where NPAs are on a rise.
- Harsh Loonker