The Reserve Bank of India has provided a fresh tool for lenders and corporates to deal with the ever growing problem of non-performing assets and take steps to put real assets back on track.
The Scheme for Sustainable Structuring of Stressed Assets (S4A) applies to all projects which have started commercial operations and have Rs 500 crore of debt.
What has changed this time from previous schemes is that the RBI wants banks to segregate a stressed loan into ‘sustainable’ and ‘unsustainable’ segments. The sustainable portion can be serviced by the borrower through existing cash flows (based on current estimates) from his operations.
The balance, classified as “unsustainable” will get converted into equity, convertible preference shares, or optionally convertible debentures. This gives greater scope for banks to recover their dues.
What the RBI is attempting to do through this scheme, is make decision making smooth and quick, whether it be in determining segmentation of stressed assets and, in some cases, decisions relating to write backs in balance sheets of banks.
To streamline the process further, the RBI has said that where the scheme comes into operation, an overseeing committee [an advisory body comprising of experts and constituted by the Indian Banks’ Association, in consultation with the RBI] will independently review the processes involved in preparation of the resolution plan.
Other key changes are that the portion which is classified as sustainable debt can become a standard asset only after four quarters of successful servicing. The scheme thus has clear positives, but it was not a game changer, analysts said.
“Overall the S4A scheme provides another tool for banks to resurrect bad loans with a clear intent to restrict permeation of stress due to tightening credit standards,” says Dhananjay Sinha, head of institutional research, economist and strategist of Emkay Global Financial Services.
Another key factor, Sinha said that banks will not have a leeway in deciding the provisioning for stressed assets. Both the promoters and the banks will have to take equal haircut in the process. Sinha identified private banks like Axis Bank and ICICI Bank will be the best suited, in reference to this scheme.
Parag Jariwala of Religare Capital Markets says the threshold of Rs 500 crore -- for the scheme -- is “too low” and should have been higher. “The guidelines should benefit companies which are under severe stress and have very high leverage,” he says in a note to clients.
Stocks of public sector banks rose by Tuesday close, on hopes of a positive impact from the scheme. Punjab National Bank stock jumped 7.9 percent to Rs 89.5 at the Bombay Stock Exchange, Bank of India stock ended up 3.37 percent at Rs 90.45 and Bank of Baroda rose 1.99 percent at Rs 148.8.
Indian banks, particularly those in the public sector, have been struggling with bad debts, rising provisioning for bad loans and weaker earnings. The January to March quarter was one of the worst, in terms of earnings growth, ever seen by state-owned banks.
The RBI has conducted an asset quality review of banks in India, who have time till March 2017 to clean up their balance sheets.
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