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 eight 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
take over 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 of 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 due to 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, Urjit Patel, was 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 seek 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.
Originally published by India Business Law Journal.
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