RBI revises SDR norms; asks banks to higher provisions of 15%

The Reserve Bank today asked banks going in for strategic debt restructuring (SDR) scheme to make sufficient provisions to the tune of 15 per cent of the loans value, to tide over possible loss in the value of the equity they acquire in lieu of debt and residual loans.
The new direction came in after the central bank today tweaked some of the SDR norms after many of the stakeholders sought more flexibility.
The RBI said it is possible that the lenders, after invoking SDR in an account, may not be able to sell their stake to new promoters within the 18 month period, thus revoking the 'stand-still' benefit, which may result in sharp deterioration in the classification of their remaining loan exposures from what prevailed on the 'reference date'.

"To avoid the cliff effect of resultant provisioning, banks should build provisions such that by the end of the 18-month period from the reference date, they hold provision of at least 15 per cent of the residual loan," RBI said in a notification issued here today.
The required provision should be made in equal installments over the four quarters and it shall be reversed only when all the outstanding loans in the account perform satisfactorily during the 'specified period' after transfer of ownership control to new promoters.
The RBI reiterated that the trigger for SDR must be non-achievement of the viability milestones and non-adherence to 'critical conditions' linked to the option of invoking SDR, as stipulated in restructuring agreement, and SDR cannot be triggered for any other reason.

The central bank asked banks to do due diligence to make sure that the 'new promoter', to whom they divest their equity, should not be a person or entity or subsidiary or associate from the existing promoter or the promoter group.

The central bank also said the asset classification benefit will be available to the lenders provided they divest a minimum of 26 per cent of the shares of the acquired company to the new promoters within the stipulated time line of 18 months and the new promoters take over management control.
The RBI 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.
"It is advised that banks should strictly adhere to the provisioning as prescribed under SDR framework while refinancing the existing debt of the company under the 'new promoter'," the notification said.
The RBI said the revised guidelines will be applicable prospectively, adding "however, it would be prudent if banks follow these guidelines even in cases where JLF has already decided to undertake the SDR mechanism."
The apex bank also reduced the proportion of lenders, by number, required for approving the corrective action plan (CAP) has been reduced to 50 per cent from 75 per cent earlier.

It said approval of the Joint Lenders Forum Empowered Group (JLF-EG) is mandatory only in cases of rectification with additional finance and cases of restructuring under the the corrective action plan.
"The top two banks in the system, in terms of advances, namely SBI and ICICI Bank, will continue to be permanent members of JLF EG, irrespective of whether or not they are lenders in the particular JLF," it said.
The RBI said the JLF should sign off the detailed final CAP within the next 30 days from the date of arriving at such an agreement.