World Economy

RBI Offers Debt Lifeline to Promoters, Banks

RBI Offers Debt Lifeline to Promoters, BanksRBI Offers Debt Lifeline to Promoters, Banks

The Reserve Bank of India allowed banks to conduct deep restructuring of large accounts to revive projects that can be saved, effectively throwing a lifeline to promoters who risked losing their companies.

Banks are anyway struggling to dispose of many stressed assets they have already acquired and have no clue what to do next. Accounts that are worth Rs 500 crore ($75.76 million) or more and have already started commercial operations will be eligible for the new recast scheme, titled “Scheme for Sustainable Structuring of Stressed Assets”, PTI reported.

Only those promoters who have shown no malfeasance in their actions while running the show can ask for the permission to continue with the management, even if they get reduced to minority shareholders in the process.

R. K. Bansal, executive director, IDBI Bank, said the two sectors which would benefit are steel and power.

Some of the completed projects in these sectors were hit by external factors. Deep restructuring is done to ensure long-term sustenance.

The strategic debt restructuring (SDR) scheme was of limited use in such cases. Under it, banks could convert debt into equity and take control of a company and sell off the assets. However, if they were not able to dispose off the assets within 18 months, the lenders had to incur heavy provisions.

In about a dozen companies where banks invoked SDR, they have not found a single buyer, defeating the entire purpose of loan recovery and at the cost of running down the company, which often could be just victims of economic downturn.

Stating the 18-month timeframe of SDR was not enough for making full provisions on large loans, banks had asked for more time, necessitating the new scheme, RBI said.

  A Second Chance

According to B. Shriram, managing director, corporate banking, State Bank of India, the new scheme “gives a second chance to the existing promoters, and helps banks restructure loans fast to protect the value of the assets.”

Under the new scheme proposed by the regulator, lenders will first segregate 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”.

The restructuring exercise involves the unsustainable portion of the debt, which at the time of such recast should not be more than 50% of the total debt.

An independent agency will have to conduct a techno-economic viability report to gauge the amount of the sustainable debt and any resolution plan should be agreed upon by a minimum of 75% of lenders by value and 50% of lenders by number in the consortium.