By Nilesh Chandra
and Abhinav Mishra,
In wake of Indian commercial banks having far exceeded their loss-bearing capacity, microprudential supervision for revival of assets prior to the onset of trouble has donned a veil of urgency. The Reserve Bank of India (RBI) has stressed that in addition to having a spill-over effect on the market, non-performing assets (NPAs) are detrimental to the economy on account of low asset-performance, rapid deterioration and distress caused to lenders and investors.
In terms of the Framework for Revitalization of Stressed Assets, released by the RBI in February 2014, lenders are required to report early signs of stress on an asset, based on the overdue period of principal or interest payment. If the overdue period is 61-90 days and the aggregate exposure is over `1 billion (US$15 million), lenders must form a “joint lenders’ forum” and initiate a “corrective action plan”, which includes: (i) rectification (via borrower/promoter commitment to ensure cash flow/infusion of equity); (ii) restructuring; and (iii) recovery of the account as a last resort.
The RBI’s well-intentioned 2014 framework provided a robust initial structure. However, despite the framework, long-term debt financing of infrastructure and core industry projects was still a cause of concern as it required a flexible and longer repayment mechanism, in sync with their unconventionally longer (up to 25-30 years) economic/concession life. Under the framework, to avoid asset-liability mismatch, a repayment period of only 8 to 12 years (factoring in the moratorium period) could be extended by lenders, straining the viability of projects and restricting the ability of promoters to generate further investment.
To address this, RBI rolled out the 5/25 scheme in July 2014, under which the lenders could allow a greater amortization period to infrastructure and core industries projects and the existing or new lenders could refinance the project loan periodically post commercial operation of the project.
While these initiatives partly addressed the grievances of the lenders, in many cases despite substantial sacrifices by the lenders, inefficient management of the borrower’s company led to the non-improvement in the stressed assets. Accordingly, the RBI came out with the strategic debt restructuring (SDR) mechanism to further enhance the lenders’ capabilities to carry out change in management/ownership of the borrower.
The SDR mechanism allows lenders to convert debt into equity and takeover the management of the defaulting borrower within 90 days from the date of the restructuring package and find a buyer for such acquired debt within 18 months, during which the underlying debt would not attract any asset-classification regulations and provisioning norms. However, failure to find a promoter within the above-mentioned timeframe would require the lenders to classify the account as NPA.
Though initially expected to be a game-changer, the SDR mechanism failed to produce the desired results. Accordingly, the RBI in June 2016 rolled out the Scheme for Sustainable Structuring of Stressed Assets (S4A scheme), aimed at plugging several loopholes in the SDR mechanism and providing methodical financial restructuring of bulky accounts facing stress. The S4A scheme permitted bifurcation the debt into sustainable and non-sustainable portions, and conversion of the non-sustainable portion into equity.
The S4A scheme, in terms of the resolution plan, leaves the lender at liberty to allow the promoter of the borrower to continue (thereby ensuring the promoter’s “skin in the game”) instead of having to necessarily find a new promoter within 18 months under the SDR mechanism.
However, for an account to be eligible under the S4A scheme the project must have: (i) commenced commercial operation; (ii) exposure of `5 billion; and (iii) at least 50% of sustainable debt. Such barriers to eligibility would exclude several projects stuck in the pre-operation phase on account of the recent regression in the Indian market. Further, no change in the terms of the sustainable portion of debt is allowed under this scheme. In addition, several lenders have voiced grievances over personal guarantees required from promoters and the stringent provisioning norms applicable even on the sustainable portion of the debt.
The RBI under its new governor, Dr. Urjit Patel, is expected to comprehensively revise the S4A scheme to address the grievances of the stakeholders by the end of October. Whether it will again carry out only pedantic regulatory reforms to temporarily comfort the stakeholders, or endeavour to strengthen the immature stress-test designs and weak resolution mechanisms, will speak volumes about Patel’s understanding of the nuances of the Indian economy.