Lenders put top NPA cases on standby over S4A norms delay

The creditors of Alok Industries and Bhushan Steel are waiting for RBI to issue fresh guidelines

Under S4A norms, promoters will be required to dilute their shareholding in exchange for converting a part of the unsustainable debt into equity. Photo: Aniruddha Chowdhury/Mint
Under S4A norms, promoters will be required to dilute their shareholding in exchange for converting a part of the unsustainable debt into equity. Photo: Aniruddha Chowdhury/Mint

Mumbai: As the Reserve Bank of India (RBI) delays releasing guidelines for the so-called S4A (sustainable structuring of stressed assets) scheme, lenders to some of India’s most debt-ridden companies are keeping those accounts on standby.  

According to three bankers with knowledge of the matter, creditors of textile maker Alok Industries Ltd and Bhushan Steel Ltd have evaluated the books of these companies and are waiting for RBI to clear the path ahead for them to implement S4A.  

As of March 2016, Bhushan Steel had consolidated debt of Rs44,477.93 crore and Alok Industries Rs22,075.15 crore.

RBI introduced the S4A scheme in June, allowing banks to convert as much as half the loans held by corporate borrowers into equity or equity-like securities. The move was 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.

“In case of Alok Industries, the evaluation study has established that less than half of the company’s debt is actually sustainable. We are expecting RBI to give some leeway in the structuring of the guidelines, so this case might benefit from the restructuring,” said a senior official at a state-run bank, with direct knowledge of the case. The banker spoke on condition of anonymity as the discussions are confidential.  

Lenders to Alok Industries decided on a strategic debt restructuring (SDR) of the company in November 2015, the company had said in a stock exchange notification. Under this scheme, lenders would be allowed to convert part of the debt in a company to majority equity, thereby taking over operational control. In January, it said lenders planned to acquire 65% of the company by converting debt to equity under SDR.  

The S4A option was considered after lenders failed to find a suitable buyer for the company.

In the case of Bhushan Steel, the lending consortium led by State Bank of India (SBI) and Punjab National Bank (PNB) has conducted a forensic audit, but hasn’t moved ahead on the case since it is waiting for the final S4A guidelines, said the deputy managing director of a large state-owned bank, also on conditions of anonymity.  

In January-March, lenders to Bhushan Steel started classifying the account as a non-performing asset under RBI’s asset quality review. This was done after efforts for debt resolution such as joint lender forum (JLF) discussions and the 5/25 refinancing plan, which allows banks to extend the tenure of infrastructure loans, failed. The JLF was set up after the Central Bureau of Investigation (CBI) arrested Neeraj Singhal, vice-chairman at Bhushan Steel, in the cash-for-loans case in 2014.

At the monetary policy announcement on 4 October, RBI governor Urjit Patel said the regulator would announce reworked guidelines around the S4A restructuring scheme by the end of that month.

The regulator had said that it was looking at changing certain aspects of the guidelines which might come in the way of practical application, such as allowing banks to classify so-called sustainable debt as a standard account. The final guidelines are yet to emerge.  

“There is a time component to turning around stressed assets. These cases have already seen a lot of delay in the reworking of their debt, things need to move fast now,” said the second banker cited above. 

Alok Industries and RBI did not respond to queries mailed to them. A spokesperson for Bhushan Steel did not respond to messages sent to his cell phone.

“The regulator's delay in issuing revised guidelines points at RBI’s need for making S4A a more inclusive restructuring mechanism. While the banking regulator does not want to seem like it is being too easy on restructuring cases, it does want to bring in more cases under S4A,” the managing partner of a stressed asset consulting firm said on conditions of anonymity.

Others say delays in restructuring are also a function of banks’ inertia.

"Regulatory delays are one thing, but lenders are also not really willing to take tough calls in difficult situations. Most public sector banks seem to be too scared of vigilance-related investigations, which acts as a deterrent when they have to decide on taking big haircuts during such turnaround cases,” the head of the restructuring practice at a global consulting firm said, also seeking anonymity.

According to the S4A norms issued by the central bank in June, banks are allowed to split the debt of a stressed company into sustainable and unsustainable parts.  

According to RBI norms, the unsustainable debt can be converted into long-term, equity-like instruments that will be on a bank’s investment books while the rest of the debt can be restructured.

Under S4A norms, promoters will be required to dilute their shareholding in exchange for converting a part of the unsustainable debt into equity.

These promoters’ shares would be given to banks, which will continue to hold them till a company turns around, after which lenders can sell the equity.  

Promoters will continue to have the first right of refusal to these shares.  

Most other restructuring options on offer have not delivered satisfactory results, resulting in higher accumulation of bad loans on the books of banks, which collectively hold Rs6.3 trillion of non-performing assets.

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