The Reserve Bank of India (RBI) has issued guidelines on sustainable restructuring of stressed assets, which would be applicable to accounts where projects have commenced operations with more than Rs500 crore debt. However, with the new norms, haircut assumptions for stressed assets will not change and the threshold of Rs500 crore for debt restructuring is too low, says a research report.
In the note, Religare Capital Markets Ltd, says, "The guidelines should benefit companies which are under severe stress and have very high leverage. Haircut assumptions for stressed assets will not change; in fact, they will get recognised early resulting in high credit cost for banks in FY2017 and first half of FY2018. We do not rule out the possibility of companies adopting this route for debt reduction, which are otherwise viable."
The RBI guidelines ask banks to follow asset classification or provisioning requirement as per the strategic debt restructuring (SDR) or outside SDR scheme, in case the resolution involves a change in promoter. In other cases, an account can remain standard, if banks have either provided greater than 40% towards debt held in Part B or 20% towards the aggregate debt (Part A and B). Accounts, which have slipped into non-performing assets (NPAs), will continue to be classified as NPA and can be upgraded to standard after one year of satisfactory performance of Part A loans. After this, banks can reverse excess provisions post one year of implementing the resolution plan. Mark to market (MTM) provisions on Part B loans would need to be spread over four quarters.
Existing debt will be divided into Part A and B. Part A loans would be the portion of debt that can be sustained with existing cash flows from operations. There would be no moratorium, relaxation or reduction of interest on Part-A loans and these loans should form at least 50% of current debt, the RBI says.
Part-B loans would be the difference between current outstanding debt and Part-A loans. These loans will get converted into equity, convertible preference shares, or optionally convertible debentures. Equity shares would need to be marked to market on weekly basis, while preference shares and debentures would be valued on discounted cash flow (DCF) basis. The guidelines state that the discount rates on preference shares and debentures should be 1.5% higher than lending rates. When preference dividends are in arrears, the value of preference shares should be discounted further by 15% for the first year, 25% for the second year and so on.
Religare says, existing promoters of large borrower companies are allowed to continue if they give up their stakes in the same proportion as that of Part B to total dues. This will create a moral hazard as equity write-off always precedes debt. Overall, the new norms from RBI on stressed asset are not a game changer, it added.