RBI launches new debt restructuring scheme

The Dollar Business Bureau

The Reserve Bank of India on Monday launched a new scheme ‘Sustainable Structuring of Stressed Assets’ (S4A) which allows lenders to divide the stressed loans into sustainable and unsustainable portions. 

Under sustainable portion, banks need to divide the existing debt of a company into sustainable (a share which can be serviced by the company even if cash flows remain the same as now) and ‘unsustainable’ which can be converted into equity or compulsory convertible debentures. To smoothen things the Govt will take the help of an independent agency to ascertain the economic viability of the project and the resolution plan.

The aim of this scheme is to permit banks to rearrange stressed loans of over Rs.500 crore including accumulated interest and the RBI will play a dominant role in the entire process. Nothing will happen without its blessing, said an official source of the RBI.

ICRA the independent rating agency, voiced that, "Implementation of the guidelines would help bridge the gap between the actual expected losses and provisioning cover, therefore, it would be a credit positive.” However, the agency also voiced that lenders with higher provision cover on stressed accounts are expected to benefit more.

Several banks including ICICI Bank, Bank of Baroda, Federal Bank, State Bank of India, PNB, and Axis Bank are going to be benefitted from this scheme. According to the rules, lenders need to maintain 20 percent provision on the overall outstanding or 40 percent of the unsustainable portion of the debt at the time of S4A.  

This scheme will be more beneficial to borrowers in the power and steel sectors. It may also be useful for corporates having a huge debt burden as they need to pay interest just on the sustainable portion of the overall debt. However it remains to be seen if the banks’ practice of giving new loans for repaying the old ones, or what is termed as  ‘evergreening’ will stop with this scheme.