RBI’s new debt restructuring scheme may not be a game changer

According to analysts and bankers surveyed, India’s Reserve Bank of India’s (RBI) new measure to tackle the pile of mounting bad loans in the banking system was not expected to be a game changer.

New norms pertaining to the Scheme for Sustainable Structuring of Stressed Assets do address some of the issues faced in earlier strategic debt restructuring (SDR) programs, where banks were unable to sell off the assets after taking management control of a company and converting its debt into equity.

The new scheme raised doubts on the practice of banks giving a new loan to repay an old one, also known as evergreening of loans.

According to credit rating agency  ICRA, the move might help the reduce the reported level of gross non-performing loans by 30-100 basis points from the current 7.7% as on 31 March 2016, after a lag of one year (following satisfactory performance of the sustainable debt portion).

The process would commence with loans worth INR 750,000-800,000m ($11 – 12bn) would be taken up for restructuring under the new norms.

The challenge pointed out by bankers is that this scheme is only for projects that are operational. So, several projects in the power and the infrastructure space would not qualify.

Under the new scheme, banks will have to divide the existing debt of a company into ‘sustainable’ (the share which can be serviced by the company even if cash flow remains the same as now) and ‘unsustainable’. An independent oversight agency will ascertain the economic viability of a project and the resolution plan.

The resolution plan needs to ensure that the unsustainable portion of the debt should be converted into equity/redeemable cumulative optionally convertible preference shares. The scheme also limits lenders from granting any fresh moratorium on interest or principal repayment or reduction of interest rate for servicing of the sustainable debt portion.

Analysts believe that this distinction between sustainable and unsustainable debt might also lead to problems and could cause limitations as it depended on the ability of banks to segregate stressed loans and the willingness of banks to absorb haircuts on the unsustainable portion.

Unlike the earlier norms, under new rules, the promoters are allowed to have management control. This, analysts believe, would create a moral hazard as equity writeoff always precedes debt.

However, bankers do expect a smoother resolution with this as compared to the earlier SDR norms. However, its impact will have to be tested over period of time to see how effective this tool had been in tackling bad loans problems being faced by the banking industry.

Source: Business Standard

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