Banks to rely on forensic audit for stressed projects

Bankers say SDR has failed in its intended results and as such a new restructuring exercising is the need of the hour

The Reserve Bank of India (RBI) might ask banks to use forensic audit to pick up projects that need to be restructured and let the original management of the company run the show instead of the lenders taking over.  

Under the existing norms, if banks fail to nurse back a company to health through various restructuring exercise, the lenders finally take control of the company under strategic debt restructuring (SDR). Banks take over the management control of companies by converting the debt into equity.

While lenders have indeed invoked SDR in a couple of cases, they are stuck with the assets as they could not find new management for the companies; the banks themselves are clueless on how to run these firms.

Bankers are of the opinion that SDR has failed in its intended results and as such, a new restructuring exercising is the need of the hour. They had also given the same feedback to the central bank, following which RBI is in talks with the lenders for formulating the new recast norms.  RBI governor Raghuram Rajan said in his second quarter monetary policy earlier this week that the central bank was working with the government and the Securities and Exchange Board of India (Sebi) to figure out how debt-laden promoters get a way to continue with their business.

The banks may insist on a forensic certificate for each of the individual cases to ensure the financials and other details of the project or company are healthy and free of malfeasance.

Only then can the existing promoter be given a chance to run the company again, even though the bank and the promoter will have to take equal haircut for the unsustainable debt portion of the company. While a bank will have to forego its due, the promoter will have to dilute its stake in favour of banks.

Forensic audit is rarely done in case of individual companies unless the entire bank is in trouble. In 2013, RBI initiated forensic audit against United Bank of India after the bank’s bad debts shot up.