RBI Tweaks Debt Restructuring Rules; Eases Provisioning Needs

The Reserve Bank of India on Thursday revised debt recast rules, reducing the provisioning burden for lenders. The details of the revision follow an October 4 statement from the RBI, where the regulator said that it had taken note of requests from the banking sector to relax provisioning rules under the Scheme For Sustainable Structuring of Stressed Assets (S4A).

The RBI, however, has not given in to demands from the banking sector to allow them flexibility in changing terms of the loan being restructured.

Under S4A, banks had been allowed to divide a company’s debt into a sustainable part and an unsustainable part. The sustainable part, which had to be at least 50 percent of the total debt, could be serviced with existing cash flows. The unsustainable part of the debt could be converted into equity or equity-linked instruments and held in the investment books of the bank.

The original guidelines, however, said that the asset would continue to be classified as it was before the restructuring for at least a year, till the borrower showed an improvement in the repayment track-record.

This provision has now been eased.

The sustainable part of the debt may be treated as a ‘standard asset’ upon implementation of the scheme subject to some provisions being set aside. The provisions to be made upfront should be the higher of 50 percent of the unsustainable amount or 25 percent of the total amount of the loan.

Further, the RBI says that the unsustainable part can be upgraded to standard category after one year of satisfactory performance of the sustainable part of the debt.

The Original Scheme

The S4A scheme was introduced by the RBI in June 2016 after a previous scheme called Strategic Debt Restructuring (SDR) failed to take off. Under SDR, the RBI had asked banks to convert debt into equity and replace the management of a stressed account. However, banks were unable to push this through. Yielding to industry requests, the regulator then introduced the S4A scheme which did not require a change in management but included some stringent conditions.

• At least 50 percent of the company’s debt should be seen as sustainable
• The sustainable part of the debt should be serviceable with existing cash flows
• No rescheduling of the sustainable portion of the debt would be allowed
• The classification of the account should remain what it was before the restructuring for at least one year
• The unsustainable part of the debt should be converted into long-term equity-linked instruments

RBI Refuses To Cede To Bankers’ Demands

While the RBI has provided provisioning relief to bankers through the changes announced on Thursday, it has not yielded to all their demands.

One of the demands was that the RBI should allow less than 50 percent of the debt to be classified as sustainable. This would have allowed a far larger number of cases to become eligible for restructuring under the S4A scheme. Large steel companies, in particular, were hoping that this relaxation will allow them to restructure their loans.

A second demand was that banks be allowed to rework the schedule of repayments of the sustainable part of the debt. This would have helped companies regularise payments quicker.

Both relaxations would have allowed banks to kick the can down the road and may have permitted unsustainable loans to be restructured.

Still, bankers say the relaxations are useful.

Definition Of Control Under Strategic Debt Restructuring

The RBI has also issued some clarifications on the strategic debt restructuring rules under which banks can change the management of a stressed firm. The clarifications pertain to the control of a stressed asset.

Ability To Extend Tenure Of Loans

Further, the RBI has extended the applicability of the 5/25 scheme under which the tenure of infrastructure and core sector loans can be extended.

The regulator now says that this provision can be used across other sectors as well.

“..it has now been decided that banks may apply flexible structuring to: a) new project loans in all sectors; and b) existing project loans, in which the aggregate exposure of all institutional lenders exceeds Rs 250 crore, in all sectors..." says the RBI.

Banks have also been asked to put in place a detailed policy on flexible structuring of loans to various sectors based on their economic life and other factors.

A More ‘Pragmatic’ Approach

Urjit Patel, the 24th governor of the RBI, has said that the regulator will deal with the bad loan problem with “firmness” and “pragmatism”. His comments came at his first press conference on October 4 where he said that the bad loan problem will be dealt with in a manner that doesn’t hurt credit flow to the economy.