India: Sweat Over Stressed Assets: First Big Test For RBI Chief

Last Updated: 20 April 2017
Article 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 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions