Photo: Bloomberg
Photo: Bloomberg

Lenders increasingly turn to SDR for stressed assets

'Significant' haircuts to debt needed to restore viability, generate interest among buyers for assets, says report

Mumbai: Lenders of stressed accounts are invoking the so-called strategic debt restructuring (SDR) provisions to defer asset classification by 18 months, according to a Credit Suisse report on Monday.

Most stressed accounts are usually on the verge of being declared non-performing assets (NPAs). But invocation of SDR allows a lender or bank to take over the management of a firm after converting debt into equity in cases where debt restructuring has failed or is nearing failure. It also helps the bank hold the equity for 18 months and in this period sell assets or look for new management for the firm.

Once a loan is classified an NPA, banks have to set aside money to cover the risk of default, hurting their profitability. Invoking SDR gives them 18 months to find a buyer. In the meantime, the asset will retain the classification it had before debt was swapped into equity. If the loan is being recast under the corporate debt restructuring cell, it will continue to be treated as a restructured loan and attract lower provisions.

In recent months, banks have been turning to SDR as a tool to manage stressed assets. “There has been a significant pickup in activities under the SDR route over the past few months, with the banks invoking SDR in case of nine accounts with debt of 57,000 crore (1% of system loans)," Credit Suisse said.

The majority of these stressed accounts had been restructured earlier but have failed to achieve set targets. Also, with their restructuring moratoriums now ending, many would have been on the verge of turning into NPAs, the report said. “Significant haircuts to debt are essential to restore viability or generate interest in potential new owners. Debt-to-market cap for these companies are already at 15-50x. Therefore, conversion for even majority equity ownership translates to only a 2-7% reduction in debt burden that may be insufficient to improve viability of these assets," it said.

The report noted that SDR is a powerful tool as it involves converting part of debt to equity by the banks to get majority equity ownership. “The control enables them to deal with non-cooperating promoters as they can now look to transfer asset ownership. However, given the lack of disclosure requirement on these assets and built-in 18-month dispensations on asset classification, it appears to be getting used more for deferring provisioning. This is evidenced from its use primarily in stressed corporates coming out of restructuring moratoriums," it said.

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