The Reserve Bank of India (RBI) on Thursday made it easier for banks to exit from Strategic Debt Restructuring (SDR) cases but at the cost of increased provisioning.
The central bank also extended the SDR scheme benefit to asset reconstruction companies (ARCs) which are members of any Joint Lenders Forum (JLF) mechanism.
Banks may now maintain the same asset classification on loans under SDR (where lenders take over the assets of an errant borrower and try to get a new promoter), if the banks manage to divest 26 per cent of the shares, down from 51 per cent earlier.
Lenders should, however, grant the new promoters a ‘right of first refusal’ for subsequent divestment of their remaining stake, the central bank said.
Continuing with its earlier rules, RBI said the divestment has to be made within 18 months of taking over the assets. Thereafter, the lenders would have the option to exit their remaining holdings gradually, with an upside as the company turns around, RBI said. Also, the conversion from debt to equity in favour of banks would have to be completed before 210 days. If not, the asset classification would worsen and it would be classified according to the condition of the account and the extant norms.
According to the latter, equity shares held by banks under the scheme were exempted from the requirement of periodic mark-to-market (MTM, recalculating the values of assets at current prices) revision for the 18-month period.
However, RBI said, banks should now periodically value and provide for depreciation of these equity shares to avoid bunching of provisioning requirements if things go wrong. The minimum provisioning required for bad assets was 15 per cent. The idea was this: As long as the project is in the 18-months window, the asset classification remains ‘standard’ and a bank only provides a marginal amount. However, if the banks are not able to sell the project and the classification becomes that of a bad debt, banks should be ready with such provisions.
However, the latter may be spread out. “Banks will, however, have the option of distributing the depreciation on equity shares acquired under SDR over a maximum of four calendar quarters from the date of conversion of debt into equity i.e., the provisioning held for such depreciation should not be less than 25 per cent of this during the first quarter, 50 per cent of the depreciation as per the current valuation during the second quarter, and so on.”
Banks desiring to have a longer period for making provisions could start making prior allocations in anticipation of MTM requirements, from the reference date itself, RBI said.
“These revised guidelines will be applicable prospectively. However, it would be prudent if banks follow these guidelines even in cases where a JLF has already decided to undertake SDR,” RBI said. “Accordingly, it is clarified that the SDR framework will also be available to an ARC which is a member of the JLF undertaking SDR of a borrower company.”
While revising the JLF norms, RBI said a corrective action plan (CAP) could be undertaken if 50 per cent of the members with 75 per cent value agree. Earlier, the guideline was that approval of a minimum of 75 per cent of creditors by value and 60 per cent by number in the JLF should agree on a CAP.
“The exiting lender will not have the option to continue with their existing exposure and simultaneously not agreeing for rectification or restructuring as CAP. It is therefore reiterated that if the dissenting lender is not able to exit by arranging a buyer within the above prescribed time, it has to necessarily adhere to the agreed CAP and provide additional finance, if the CAP so envisages,” the notification stressed.
The top two banks in the system, State Bank of India (SBI) and ICICI Bank, would continue to be permanent members of a JLF, irrespective of whether or not they are lenders in the particular JLF.
Also, RBI said, banks could give the benefit of restructuring to a company based on its viability, in which a new promoter has no link to the old one who has been accused of and removed because of malfeasance. “Further, such accounts may also be eligible for asset classification benefits available on refinancing after change in ownership,” the notification said.
Dinkar V, partner at Ernst & Young, said the changes were ‘bright lined’ – clarifying/ simplifying many aspects, while putting a lot of onus on the lenders to use the SDR effectively, in letter and spirit. RBI is explicit that SDR be used in cases where it would likely improve the asset value. Further, in the interim period, the lenders are mandated to arrest dissipation of value and facilitate revival – even by involving independent experts, as necessary. The flexibility to sell 26 per cent (verses a mandatory 51 per cent) within the standstill period would facilitate change of control.