Mumbai: The Reserve Bank of India (RBI) on Thursday announced changes in its strategic debt restructuring (SDR) scheme, allowing banks more time to divest their holdings in companies they take control of.

According to the revised guidelines, banks can upgrade an asset to the standard asset category if they divest at least 26% of the stake to the new promoter within the specified period of 18 months.

This is a significant departure from the norms released on 8 June 2015, when the regulator had asked banks to divest their entire 51% holding within the same time-frame.

“Lenders would thus have the option to exit their remaining holdings gradually, with upside as the company turns around," the revised guidelines said.

In June 2015, RBI introduced the SDR rules, which allowed banks to convert loans into majority equity, and find a new buyer for the company over a period of 18 months.

The rules came against the backdrop of an increase in stressed assets in the banking sector. As of September 2015, stressed assets, including restructured assets, were estimated at 11.3% of total advances.

Banks moved to use the SDR provision quickly, but have found it difficult to find ready buyers for the equity stake they now hold.

The easing of norms to allow them to divest only 26% within 18 months and the rest later will come as a relief for banks.

“If the new norms are executed well it will make a huge difference where banks will get time to find the right partner," said Narayan K. Seshadri, chairman at Tranzmute Capital and Management Pvt. Ltd, a business advisory firm.

An investment banker advising banks on distressed asset deals agreed that the change in this key provision will ease the pressure on banks.

“This regulation has been brought in to find a solution which is more realistic and implementable because if banks had to divest entire 51% within 18 months they had to find investors who can cut such large cheques, which was difficult to conclude," said the banker on condition of anonymity.

While this one provision has been eased, other rules have been tightened.

For instance, RBI has said that the equity shares acquired under the SDR mechanism will have to be periodically valued and the depreciation in the value of these shares will have to be provided for as per the Income Recognition and Asset Classification (IRAC) norms.

Banks will, however, have the option of distributing this depreciation over a maximum of four calendar quarters from the date of conversion of debt into equity, RBI said.

In its June guidelines, the regulator had said that these shares shall be exempt from the requirement of periodic mark-to-market for the 18-month period.

“With periodic provisioning becoming compulsory, the banks’ books can be kept clean, which will help them avoid any severe hit during any specific quarter," Seshadri said.

The banking regulator has also told banks to conduct necessary due diligence to ensure that a potential buyer is not a person/entity/subsidiary/associate of promoters whose assets they dispose of.

Mint reported on Thursday that banks had been issued an informal warning by RBI to conduct enhanced due diligence on new buyers.

“It is reiterated that the trigger for SDR must be nonachievement of viability milestones and/or non-adherence to ‘critical conditions’ linked to the option of invoking SDR, as stipulated in restructuring agreement, and SDR cannot be triggered for any other reason," RBI added in its circular.

The banking regulator has also stated that personal guarantees or commitments obtained from existing promoters should also cover losses incurred by lenders. Banks should devise a policy for invocation or release of these personal guarantees and this should be based on the principle of reasonable satisfaction of lenders’ claims, RBI said.

“This could include pledge of the existing promoters’ share in favour of the lenders if not already done. In any case, personal guarantees should be released only after transfer of ownership and/or management control to the new promoters," the revised guidelines said.

RBI also revised certain rules related to the joint lenders’ forum (JLF) mechanism which was first introduced in April 2014 to help banks better manage their stressed assets.

As per the revised rules, only 50% of the lenders by number need to agree to a corrective action plan (CAP) devised by the forum for a stressed asset. Earlier, 60% of the lenders by number were required to agree to a plan for it to be implemented.

Also, in the earlier JLF framework it was stated that dissenting banks which did not want to participate in the restructuring or rectification in a particular case could find a new buyer for the loan and exit.

According to the revised norms, if the dissenting lender is not able to find a new buyer, it would have to agree to the CAP and provide additional financing if it is part of the plan.

RBI has been trying to find ways to resolve the stressed asset problem plaguing the Indian banking sector for the last two years. In January 2014, RBI announced a new framework for dealing with stressed assets, as part of which banks were asked to form JLFs to recognize and resolve stressed assets early.

Then RBI introduced the SDR rules—the most significant change in the stressed asset resolution framework.

Since the SDR rules were introduced, lenders have converted debt to equity in a number of firms including Electrosteel Steels Ltd, Ankit Metal and Power Ltd, Rohit Ferro-Tech Ltd, IVRCL Ltd, Gammon India Ltd, Monnet Ispat and Energy Ltd, VISA Steel Ltd, Lanco Teesta Hydro Power Pvt. Ltd, Jyoti Structures Ltd and Alok Industries Ltd.

Some analysts have raised concerns that banks are being too hasty in invoking the SDR scheme without ensuring that there are buyers for these assets in the market.

The SDR route introduced by RBI will defer the recognition of stressed loans as non-performing assets (NPAs), without solving the core bad asset problem, said a January report by Religare Institutional Research. Credit Suisse had expressed similar concerns in a December report in which it said that “given the lack of disclosure requirement on SDR and built-in 18-month dispensations on asset classification, it appears to be getting used more for deferring provisioning".

RBI has said it was keeping a close watch on how the scheme is being implemented by the banks to ensure there is no misuse.

The regulator is taking a zero-tolerance approach towards bad loans and has asked banks to clean up their books by March 2017. As part of this plan, banks were required to classify visibly stressed assets as bad loans in the December 2015 and March 2016 quarters.

The clean-up has meant a surge in NPAs.

Gross NPAs of 39 listed banks surged to 4.38 trillion in the quarter ended 31 December 2015, from 3.4 trillion at the end of the September quarter, according to data collated by corporate database provider Capitaline.

vishwanath.n@livemint.com

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