BackNBFCs seek SDR provisions to tackle infra sector stressed assets
Request put across at a closed-door meeting between Raghuram Rajan, select bankers, representatives of NBFCs and ARCs
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Mumbai: Non-banking financial companies (NBFCs) have asked the Reserve Bank of India (RBI) to consider extending provisions of the strategic debt restructuring (SDR) scheme to them as many of them lend to the infrastructure sector where stress levels continue to be high, said two people familiar with the development.
The request was put across at a closed-door meeting between RBI governor Raghuram Rajan, select bankers, representatives of NBFCs and asset reconstruction companies (ARCs) on Monday.
Other issues discussed at the meet included schemes introduced for stressed asset management.
The meeting reviewed the functioning of the joint lenders’ forum (JLF) mechanism, flexible restructuring of long-term project loans, the SDR scheme and regulations on sale of assets by banks to ARCs, RBI said in a statement on its website.
“The meeting took stock of the way these tools are being used by the banking system, and the improvements needed to sharpen their efficacy and ease of use," RBI said in its statement.
Since 2014, the central bank has introduced a number of measures to push lenders to recognize and resolve stressed assets in a timely manner. This includes the JLF, which is set up to come up with a corrective action plan for stressed assets; the 5/25 refinancing scheme, which allows banks to extend the tenure of infrastructure loans up to 25 years, with an option of refinancing the loan every five years; and the SDR scheme that allows banks can convert debt to majority equity.
One of the main suggestions made by the NBFC representatives at the meeting was to allow non-banking financiers to take over the stressed infrastructure assets and manage them without running the risk of higher provisions for a fixed period of time.
“Many large NBFCs have the ability to manage such infrastructure assets and create good returns before selling them to a suitable buyer at a reasonable valuation. Since we are specialist lending institutions, we must have this power too," said one of the persons quoted above, a senior official with a large infrastructure finance company, on condition of anonymity.
Under current SDR rules, only banks are allowed to convert part of their loans to majority equity in the defaulting firm. Once SDR is invoked, the asset classification on the account remains the same for a period of 18 months, not attracting additional provisions.
“There are still questions around the ability of NBFCs to recover loans from large companies. Unless there is a group of NBFCs, depending on their size and management bandwidth, giving them the same powers as banks seems a little stretched," said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP.
NBFCs can, however, play a supporting role to the banking industry in trying to recover these loans, Parekh added.
Issues around the capital position of public sector banks and ARCs were also discussed during the meeting, said the second person who was present at the meeting. He too requested anonymity.
“Public sector banks will need more capital over the next few months to cover for the higher provisions that they need to make on stressed loans this year. RBI believes that the government infusion will be enough to cover this," this person said.
On 16 January, Mint reported that banks have been asked to set aside higher provisions to cover visibly stressed assets in the second half of this fiscal—a directive that may cause bad loans and provisions to bloat.
The directive had followed an intensive asset quality review conducted by the central bank over the last two months.
In terms of capitalization of ARCs, suggestions included tapping more domestic and international stressed asset funds that could come and invest in these reconstruction companies, the second person added.
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