Analyzing RBI’s Scheme on Structuring Big Ticket Stressed Assets

[The following guest
post is contributed by Harsh Loonker,
who is a 4th year student at the Jindal Global Law School, Sonipat]
India’s central banking institution, the Reserve
Bank of India (RBI), has issued guidelines on a Scheme for Sustainable
Structuring of Stressed Assets.[1]
These guidelines would mark a significant shift in reactive measures undertaken
by regulators to act in response to the increase in stressed assets in the
banking and financial lending industry. The RBI has introduced this scheme in
order to further strengthen the lenders’ ability to deal with stressed assets
and to put real assets back on track by facilitating a rework of financial
structures in entities facing genuine difficulties. This scheme envisages the
determination of debt levels for a stressed borrower, and effectively
bifurcates the outstanding debt into sustainable debt and equity instruments,
which is expected to provide an upside on returns to lenders when the borrower’s
business turns around. The Scheme is aimed at controlling and restructuring big-ticket
accounts where the amount due is more than Rs. 500 crores. This post will look
at some of the key provisions of the guidelines/scheme and the issues that need
to be addressed by this regulatory framework.
According to RBI data, the stressed assets
ratio, which includes non-performing assets (NPAs), of the banking sector,
increased to 14.6% by the end of December 2015. This mark is against a 9.8%
level that was noted towards the end of March 2012. It must be mentioned that
state-run banks have the highest share in stressed loans. Their gross NPA, or
bad loans, alone rose from Rs. 2.6 lakh crore in March of 2015 to an exorbitant
Rs. 3.61 lakh crore in December of the same year. To better fight this rise in
bad assets, the RBI has from time to time issued guidelines and norms over
stressed assets intended for regulated lenders. Among efforts to revive
borrowers, another restructuring scheme was issued last year called the
Strategic Debt Restructuring Scheme (SDR). Complementary norms to this scheme
called the Prudential Norms on Change in Ownership of Borrowing entities were also
issued to address strategic change in ownership of the distressed
business/companies or change in promoters of the borrower company.
Certain highlights and issued presented by this scheme
The scheme formulated by the RBI is an
optional framework for structuring large distressed accounts. This scheme
starts off by determining sustainable debt limits for the borrower facing
financial distress. Then the scheme envisages bifurcation of the outstanding
debt into sustainable debts on the one side and equity in the company or quasi-equity
related instruments on the other. Already existing equity or security positions
of lenders in the distressed company will not be affected by the scheme. The
scheme lays out a detailed asset classification and provisioning of the same. In
order to make sure the entire exercise is carried out in a prudent and
transparent manner, the scheme envisages the plan for resolution to be prepared
and implemented by credible professional agencies. A decision by the Joint
lenders (JLF)/consortium of banks will be taken to resolve an account in issue.
An overseeing committee will be formed and implementation will be made within
90 days.
In a nutshell, this scheme involves a
substantial “write-down” of debt by dividing it into the above-mentioned categories.
Earlier, lenders were able to co-ordinate deep financial restructuring with
similar write-downs without being able to amend the bottom-line liability
structure of the borrower facing stress. With the second category of equity and
related instruments, banks have been given an incentive. Big-ticket lenders
will now be able to structure and write down debts while offsetting the same
with future payouts originating from owning equity in the borrower business.
Market participants and stakeholders have requested such a scheme because this
way companies under stress will be better able to deliver on their debt
commitments without placing any moratorium on interest payments. As per the
scheme, certain conditions are placed for an appropriate resolution plans,
“a) There shall be no fresh moratorium granted on interest or
principal repayments
b) There shall be not be any extension of repayments schedule or
reduction in the interest rate for servicing, as compared to repayment schedule
and interest rate prior to this resolution.”
The guidelines
therefore do not allow for any change in the terms and condition of the loan in
question. It must be mentioned that the entire scheme only supports
projects/assets where commercial operations have commenced. Therefore, this scheme
will not help lenders connected with major power projects, which are still
under implementation, and facing financial difficulties. Further, only current
cash flows connected with the asset are used as a basis while ascertaining
sustainable debt. If unsustainable debt is more than cash flow, this scheme
would be unviable.
In conclusion
This scheme is a
welcome device for financial institutions to take curative measures in order to
revive cases of stressed assets and to clear the books of accounts from bad
loans. There are other measures available for lenders in addition to this
scheme. Such as the ones available under the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993, the corporate debt restructuring framework
and the Securities and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002. But it must be mentioned that these regulatory
schemes are only directed towards big ticket lending and do not concern retail
lending for which there is a huge want in the market. Further, discussions on
setting up special funds to resurrect troubled investments through equity
infusion are already underway such as the stressed assets equity fund (SAEF)
and stressed assets lending fund (SALF). SAEF will be set up to invest in
equity of stressed borrowers bringing in fresh infusion of cash and SALF will
provide working capital infusions, or low interest bridge loans for borrowers
facing funding constraints. These regulatory measures in concert will increase
banking and lending confidence at a time where NPAs are on a rise.
Harsh Loonker

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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