Strategic Debt Restructuring is no one-stop solution

The Reserve Bank of India on Monday issued new norms for Strategic Debt Restructuring (SDR) which gives lenders the right to convert their outstanding loans into a majority equity stake if they feel that a change in ownership can help turn around the borrower’s business.

The RBI has allowed banks to acquire 51 per cent or more stake in companies, where debt restructuring has failed to revive them within a stipulated timeframe. The regulator, however, has advised banks to sell the stake to a new promoter ‘as soon as possible’.

The equity conversion clause needs to be incorporated at the time of restructuring, and the conversion of debt into equity should be at a fair value. As an added relief to banks, such an exercise will not attract higher provisioning, as the asset classification will remain the same as it was at the time the SDR was invoked.

After 18 months, the asset has to be classified in accordance with income recognition and asset classification norms.

Many industry players agree that the new norms are a step in the right direction and will put pressure on the promoter.

“It will be useful in cases where the borrower has been non-compliant and the bank is confident that a new promoter or buyer can turn things around. In other cases, the existing managements are better equipped to grapple with the situation,” says Jaideep Iyer, Group President, Financial Management, YES Bank.

According to Diwakar Gupta, former MD and CFO of the State Bank of India, the measure is welcome insofar as it does create a sense of fear amongst borrowers, resulting in better credit compliance and responsible behaviour.

While the RBI’s move is welcome and has given banks a tool to pressure wilful defaulters, it is not a long-term solution for resolving asset quality issues, according to industry players.

“These norms address only a small section of the borrowers. Many of the borrowers are genuine, and have not been able to service their debt obligations for external reasons. Many of them are willing to cooperate with banks to change the management but have been unable to find suitable buyers/investors.

“For such companies, the ability of banks to find buyers will be critical because the regulation clearly states that banks will take control only to cede control to another promoter,” says Diwakar Gupta.

Many others believe there are many challenges in implementing these norms.

“It is a tool to put some pressure on the promoter. But in realty it is difficult to implement,” says Nirmal Gangwal, Founder and MD of Brescon Corporate Advisors, a corporate debt restructuring advisory firm.

According to Gangwal, the real problem lies in the fact that most of the existing debt may not be sustainable — that is, not serviceable over the long run even if the economy revives.

“Suppose, a company has debt of ₹40,000 crore. The new promoter may value the sustainable debt, or the debt that can be serviced, at ₹20,000 crore. He may not be willing to take on the remaining debt,” says Gangwal.

Neither can rate cuts make a significant impact on the debt servicing ability of these companies. “In core sector companies, such as in the infrastructure or metal space, margins are not such that they can pay even 9 per cent interest on loans, let alone 14 per cent,” he adds.

The real solution, according to him, lies in bringing in the concept of sustainable debt. This is what needs to be addressed by the regulator.

According to Diwakar Gupta, quick decision-making within defined time-lines will be central to the effectiveness of such a framework.