RBI lets banks restructure bad loans into debt and equity
14 Jun 2016
Reserve bank of India (RBI) on Monday introduced a scheme for bifurcation of outstanding debt into ''sustainable'' debt and equity, in a bid to further strengthen lender's ability to deal with bad loans.
Ridding banks' balance sheets of bad loans that are now at a 15-year high of around Rs8,00,000 crore is crucial to reviving credit growth and further economic growth in India's $2 trillion economy.
Stressed assets, which include bad debt and restructured loans, rose to 11.3 percent of total loans as of 30 Septtember 2016, central-bank data show.
The 'Scheme for Sustainable Structuring of Stressed Assets' (S4A) will help banks put real assets back on track by providing an avenue for reworking the financial structure of entities facing genuine difficulties, the Reserve Bank of India said while issuing guidelines on a 'Scheme for Sustainable Structuring of Stressed Assets'.
Resolution of large borrowal accounts, which are facing severe financial difficulties may, inter-alia, require co-ordinated deep financial restructuring, which often involves a substantial write-down of debt and/or making large provisions. Often such high write-downs act as a disincentive to lenders to effect a sustainable change in the liability structure of borrows facing stress.
Banks have also represented for a regulatory framework, which would facilitate lenders taking up the exercise of reworking of the liability structure of companies to which they have significant exposures, in the context of asset quality stress currently faced by them.
Accordingly, RBI, after due consultation with lenders, has formulated the 'Scheme for Sustainable Structuring of Stressed Assets' (S4A) as an optional framework for the resolution of large stressed accounts. The S4A envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around.
In order to make sure that that the entire exercise is carried out in a transparent and prudent manner, S4A envisages that the resolution plan will be prepared by credible professional agencies, while an overseeing committee, set up by the Indian Banks Association, in consultation with the RBI, comprising of eminent experts will independently review the processes involved in preparation of the resolution plan, under the S4A, for reasonableness and adherence to the provisions of these guidelines, and opine on it.
