Banks expect 5/25, SDR cases to increase as new debt resolution scheme kicks in

NPAs and provisioning requirement for banks to come down

Banks and corporate have welcomed the easing of the various debt restructuring norms by the Reserve Bank of India that has expanded the scope of these schemes allowing companies from other sectors apart from infrastructure to also be a part of some schemes. Apart from this, the provisioning requirement and the quantum of bad loans on the book of the banks is also expected to go down as these toold to manage bad loans can be extended to more companies that are struggling.

"We could see reduction in restructured loans/NPLs by 2HFY17 as it can be implemented immediately. It would not be surprising if we see reduction in fresh slippages in FY2018 as 5:25 scheme gains traction. One can see immediate upgrades or reduction of SMA-2 loans of the banking system. M&A deals could slow down as it gives lenders and borrowers some headroom to tackle their challenges," said a report by Kotak Institutional equities.

Analysts believe that the public sector banks and in the private banks lenders like ICICI Bank and Axis Bank will stand to benefit.

As a result of the change is S4A norms bankers say that both lenders and companies stand to gain as it will lead to lower provisioning requirement and this in turn will have a positive impact on the bank's profit and loss account. Also, with the change in S4A norms that allows the unsustainable part to be upgarded to sustainable (with certain riders) will also have a positive impact on the bank's balance sheet as the quantum of bad loans will go down.

"Apart from this it will also help the companies undergoing S4A as once the unsustainable part is upgraded then they can also attract capital from banks and other financial institutions which can help in making the project viable in the long run," said N S Venkatesh, Executive Director, Lakshmi Vilas Bank.

Apart from this RBI has also made changes to schemes that allow banks to extend the re-payment schedule of loans to 25 years, with an option to re-finance them at the end of five years.

Now, it has allowed lenders to extend this 5/25 scheme even to the new project loans. Apart from this scheme can be extended to existing project loans that have an aggregate exposure of Rs 250 crore to banks as compared to the earlier mandate of Rs 500 crore. This in turn means that several mid-sized companies can also be a part of the scheme. Also, the 5/25 scheme can be extended to construction companies as well.

"It is not just S4A but all the other changes made in the debt resolution schemes such as 5/25 and SDR etc will improve resolution and recovery. With lowering of threshold to Rs 250 crore many more cases can be dealt under these schemes," said Arundhati Bhattacharya, Chairman, SBI.

A partner with an international consultancy firm also said that this move will allow banks to go back to business as usual and kick the can further down the road with a lack of focus on a viable turnaround plan.

"So banks may buy time but the problem will come back to bite them unless real changes in the business are made," he added.

Illustration: Binay Sinha