In yet another attempt to provide relief to banks that are saddled with large stressed loans, the RBI’s new tool — Scheme for Sustainable Structuring of Stressed Assets or S4A— allows banks to convert up to half of the loans to stressed corporates into equity or equity-like instruments. According to the new guidelines, a bank will have to decide on the ‘sustainable’ portion of the debt. The rest can be converted into equity. While these norms can help certain stressed accounts, it is unlikely to provide huge relief to banks in the near term. Here’s why:
Huge haircuts The new norms are only applicable to projects that have commenced operations and where the total exposure of all lenders in the account is more than ₹500 crore. The sustainable portion of the loan, (not less than 50 per cent of the total debt) will be decided based on what the corporate borrower can service against existing cash flows.
Through S4A, the RBI has sought to address a key issue — to identify that portion of debt which may not be sustainable or not serviceable over the long run even if the economy revives. This is imperative because debt levels of certain large corporates in sectors such as power or steel have reached unsustainable levels. In finding ready takers for businesses under Strategic Debt Restructuring (SDR) or selling bad loans to asset reconstruction companies, lack of concurrence of the serviceable or sustainable portion of debt, has impeded resolution.
Now, with banks, in effect taking a 50 per cent haircut on loans, by converting unsustainable debt into equity, the downsizing of loans could attract buyers. While this may help in certain accounts, huge haircuts may not be possible in case of highly-overleveraged companies.
Take, for instance, Bhushan Steel which has total debt of ₹42,300 crore. If one assumes a 50 per cent haircut on the existing debt (given the very low interest cover of less than 0.5 times), this is way above the existing market capitalisation of the company which is about ₹920 crore. The tale is similar for other companies such as GVK Power and JP Associates.
Given that the guidelines could result in dilution of stake of promoters, high debt to market-cap levels of some the indebted companies, may be a stumbling block for banks to take haircuts.
No easy ride The new scheme also comes with certain riders. For one, banks are not allowed to offer any moratorium on repayment on the sustainable part of the debt. They are also not allowed to extend the repayment schedule or reduce the interest rate on the debt.
This, according to some, may not allow banks to offer additional support to the borrowers.
“For the sustainable portion, the RBI could have offered a one-time restructuring so that banks re-align the current cash flows again,” says Nirmal Gangwal, Founder and MD of Brescon Corporate Advisors, a corporate debt restructuring advisory firm.
The new norms also do not offer any respite to banks on the provisioning front. In case where there is no change in promoter, and the asset is classified as standard (not NPA), the RBI has asked banks to make upfront provisioning of 40 per cent of the unsustainable debt or 20 per cent of the total debt (whichever is higher). This in effect is higher than the existing 15 per cent provisioning that a bank has to make for bad loans.
Banks also have to mark-to-market the unsustainable portion of the debt, based on the valuation criteria load down by the RBI. The difference if any will have to be additionally provided for within four quarters.
“Banks can restructure loans even now, though they will have to make a higher provisioning than the 5 per cent they made under the erstwhile restructuring window (opened until March 2015). Under the latest new scheme, banks have to make a 20 per cent provisioning and also an additional quarter on quarter provisioning on the mark-to-market of the unsustainable portion of the debt,” says Nirmal Gangwal.
An improvement over SDR While the new norms pose a few challenges, it does iron out some of the issues banks faced under SDR. In the case of SDR, lenders have to convert their outstanding loans into majority equity stake. In most cases large corporates may not be willing to let go of the full control. Under S4A, banks can step in as minority shareholders.
The concern over banks misusing the restructuring tool under SDR has also been mitigated to some extent due to the upfront provisioning under S4A. Also, there is more transparency under the new scheme as the resolution will be reviewed by an overseeing committee, set up by the Indian Banks’ Association, in consultation with the RBI.
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