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Scheme For Sustainable Structuring Of Stressed Assets: Honest Attempt At Revival

One hopes that the banks can take the signal from RBI and show boldness in decision making to help revive companies which have good business potential and in the process also improve their future prospects on account of equity upside which will accrue to them once the consumption and growth cycle picks up

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The problem of stressed loans has been spiralling over the last few years posing a serious challenge for the government and the Reserve Bank of India (RBI) to manage. There have been various initiatives already taken on this issue, still the problem remains unchecked, threatening health of Indian banks along with economic growth and sovereign rating of the country. In continuation of its policy to curb bad loans and arrest incipient stress in the system, the RBI introduced a new scheme on June 13, 2016 titled the 'Scheme for Sustainable Structuring of Stressed Assets' (Scheme), offering an alternative restructuring regime to lenders struggling with delinquencies in large accounts.

The objective of RBI in coming up with this circular seems to stem from the difficulties faced by banks and financial institutions in successfully invoking the Strategic Debt Restructuring Scheme (SDR Scheme) introduced by RBI in June, last year. Although, the RBI intended to help the Indian banks through introduction of the SDR Scheme which offered certain immediate relief to the bleeding lenders, the requirement of finding a new promoter willing to take over a stressed company along with its liabilities, within eighteen months was proving to be very difficult in the current market conditions. Therefore, a need was felt to find an option where the lenders could reduce the debt to a level commensurate with the stressed company's cash flows and work with the existing promoters to turn around the company without any fear of adverse fall out for decisions taken with a view towards revival of the stressed company.

In this backdrop, the RBI formulated the Scheme allowing deep restructuring of large accounts to revive projects that are viable. The Scheme permits lenders to determine and segregate the debt into a 'sustainable debt' component which can be serviced as per existing repayment schedule and based on the current cash flow projections while the balance amounts would be converted into equity/ quasi-equity instruments which can provide an upside to the lenders, in case of turnaround.

While this Scheme has the potential to provide relief in cases affected by overleveraging coupled with temporary external problems affecting viability, it remains to be seen if the regulatory backing for forbearance would be another exercise in postponing the problem on the part of the banks. Also, the success of the conversion cum forbearance exercise rests on accurate estimation by the lenders of the feasible debt component, which, in turn, is to be assessed on the basis of the current and immediately prospective cash flows (not later than six months) of the stressed company. This approach may not be of help to companies facing problems of low cash flows or under construction projects, like those in the infrastructure sector but on the other hand, it may result in improving the prospects of revival of several companies which may be viable on the basis of current operating levels of business but suffering on account of overleveraging.

On the positive side, the Scheme offers a bouquet of options rather than adopting a one-size-fits-all approach. The lenders, while formulating a resolution plan may either chose to allow the promoter to continue with majority shareholding or replace the promoter in terms of the SDR Scheme, bringing in new capital along with resultant change of control. In cases where the promoter is allowed to continue, the lenders have also been given the option to convert the non-sustainable debt into optionally convertible debentures. This would be a much needed flexibility as often an investor may find it difficult to retain the value of the enterprise without a recognisable promoter being in charge of the company. However, conversion of debt to equity accompanied by change of promoter would also be required to be exempted from the requirement of making an open offer in terms of the SEBI Takeover Regulations like it was done in case of SDR Scheme.

The Scheme envisages approval of the conversion proposal by an expert Overseeing Committee set up under the aegis of Indian Banks Association. While this has primarily been done to cushion decision-making in individual banks against future action, any forbearance by banks being looked at with doubt cannot be ruled out entirely. It is therefore very important to create a culture of independent decision-making at public-sector banks, free from any interference with full accountability so that such actions need not be externalised as is being proposed under the Scheme. It also needs to be borne in mind that external decision-making can cause delays in implementation leading to further slippage of the account. This, of course, is part of a larger reform in public sector banks to give them greater autonomy which is needed to foster competitive decision-making amongst public-sector banks rather than credit decisions being taken under external influence which has led to higher levels of stress in public sector banking compared to their private sector peers.

Having said that, the new regime is indeed a pragmatic step on the part of RBI to encourage banks to take decisions on debt restructuring without fear of reprisal. This may yield better results if the Scheme is also backed by faster implementation of the Insolvency and Bankruptcy Code which was approved by the Parliament earlier this year and which has the potential to restore the balance in any negotiation between promoter facing distress and the lenders by providing a time bound mechanism for restructuring and liquidation. One hopes that the banks can take the signal from RBI and show boldness in decision making to help revive companies which have good business potential and in the process also improve their future prospects on account of equity upside which will accrue to them once the consumption and growth cycle picks up.

With inputs from Rajeev Vidhani, Principal Associate and Soumava Chatterjee, Senior Associate

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Kumar Saurabh Singh

The author is Partner, Khaitan & Co

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