BackRBI offers relief to banks on bad loans
RBI's new tool S4A allows banks to convert up to half the loans held by corporate borrowers into equity or equity-like securities
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Mumbai: The Reserve Bank of India (RBI) on Monday offered a measure of relief to banks weighed down by bad loans and their stressed corporate clients, seeking to slow the build-up of sticky loans and, at the same time, ease the pressure on company balance sheets.
Banks will be allowed to convert up to half the loans held by corporate borrowers into equity or equity-like securities, RBI said in a statement.
The move is intended to help restore the flow of credit to crucial sectors such as infrastructure and iron and steel, among others, reduce the stress on corporate borrowers and stanch bad loans across banks.
Banks will be allowed to rework stressed loans under the oversight of an external agency, thereby ensuring transparency while also protecting bankers from undue scrutiny by investigative agencies.
Loans classified as non-performing assets (NPAs) surged after the central bank conducted an asset quality review across the banking sector and insisted that banks classify visibly stressed assets as NPAs.
Bad loans across the 40 listed banks in India increased to ₹ 5.8 trillion as of the end of March 2016 from ₹ 4.38 trillion at the end of December. Bankers have indicated that this number may rise further over the course of this year.
This appears to have pushed RBI into making a significant allowance for the resolution of stressed accounts.
“The Reserve Bank, after due consultation with lenders, has formulated the ‘Scheme for Sustainable Structuring of Stressed Assets’ (S4A) as an optional framework for the resolution of large stressed accounts," the regulator said.
“The S4A envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around," it added.
In simple terms, a bank can determine the amount of debt that it thinks a firm can service with its current cash flows. This proportion of debt must not be less than half the loans or funded liabilities of the company.
Once the sustainable level of debt has been determined, banks can convert the rest of the debt into equity or quasi-equity instruments.
To be sure, the scheme comes with a number of caveats.
Banks are not allowed to offer any moratorium on repayment on the sustainable part of the debt. They are also not allowed to extend the repayment schedule or reduce the interest rate on the debt, which would be akin to restructuring of a loan.
The conversion of part of debt into equity or equity-like securities will be also be governed by a set of valuation criteria laid down by RBI.
Banks will also need to set aside higher provisions if they choose to follow this route. Lenders will have to make provisions to the extent of 20% of the total outstanding amount or 40% of the amount of debt that is seen as unsustainable.
Of these two, the amount that is higher will equal the amount of provisions that a bank has to set aside. These provisions are higher than the 15% that banks make for an NPA in the first year but lower than the 100% in provisions required over a three-year period.
To ensure transparency in the process and also to protect bankers from future scrutiny by enforcement agencies, RBI has said that an oversight committee will look into cases where the scheme is invoked.
“In order to make sure that the entire exercise is carried out in a transparent and prudent manner, S4A envisages that the resolution plan will be prepared by credible professional agencies, while an Overseeing Committee, set up by the Indian Banks Association, in consultation with the RBI, comprising of eminent experts, will independently review the processes involved in preparation of the resolution plan, under the S4A, for reasonableness and adherence to the provisions," said RBI.
Bankers said that the scheme can potentially help a number of stressed firms, but pointed to certain deterrents in the fine print. Not many companies will be able to service even half their debt (the sustainable part of the debt) with their current cash flows, they said.
“There are a few challenges which the guidelines pose as of now. These allow only projects where commercial operations have commenced; due to this, we would not be able to do much for some power projects which are still under implementation," said R.K. Bansal, executive director, IDBI Bank Ltd.
“The second challenge is that if you use the current cash flows as a basis to ascertain sustainable debt, then you run the risk of accumulating too much unsustainable debt, which would then make the proposal unviable. Another major challenge is that the guidelines do not allow for banks to change the terms and conditions of the loan. This would mean that not too much support to the sustainable part of the debt can be extended," Bansal said.
He added that the oversight committee will help give comfort to bankers.
“The overseeing committee might slow the process a little but it is a necessary evil, as it gives a lot of comfort to the bankers," Bansal added.
Most companies that are under stress today would be eligible for the scheme, said a senior public sector banker who declined to be identified.
“However, one particular point is worrying. The guidelines say that while calculating the sustainable part of the debt, banks need to ensure that this part of the debt can be serviced over the original tenor even if the future cash flows remain at their current level. A number of stressed companies are functioning at such sub-optimal levels that they need constant working capital support. Bankers will have to closely study as to how many companies are actually eligible for this," said this banker.
Another concern could be the high level of equity dilution that may result from a scheme of this nature. This could be negative for shareholders and may also reduce the incentive for promoters to actually turn around the company.
The scheme is the latest in a series of measures announced by RBI to tackle stressed assets.
In December 2014, banks were allowed to extend the maturity of loans given to infrastructure companies for up to 25 years under the so-called 5/25 scheme. Initially, the scheme had been introduced for new projects but was later extended to existing projects.
In June 2015, RBI introduced the strategic debt restructuring scheme, which gave banks the option to convert part of the debt of a company into majority equity. The scheme was envisaged as a way to deal with errant promoters as it gave banks the option to change the management of a firm.
“This time the RBI seems to have worked out the rules clearly. The element of having oversight committee now takes away the fear of investigation among banks, so that is a good thing. Now banks can clearly segment and evaluate the position of the borrower," said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Llp. “Also, if the bank is able to recover (loans), then there is no provisioning. But in case of non-recovery, it is justified to be proactive and provide for," he said.
vishwanath.n@livemint.com
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