Money & Banking
‘RBI's new norms on stressed assets won’t make an impact’ - Report
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.

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COMMENTS

B. Yerram Raju

11 months ago

The problem with all restructuring exercises - whether large,small, medium - is that it lacks incentive for a banker to engage in the exercise. This one-way street does not lead to the desired destination. It is high time that the RBI modifies its policy stance: if the bank recognises a particular asset as worthy of restructuring and capable of recovering the NPAs in a desirable time-frame and backed by certain fundamentals and compliance that asset can fall between the two stools - NPAs and Standard Assets for a period of one year with mandatory half-yearly review to be submitted to the regulator in the case of all large corporate entities and to the Board of the Bank in regard to all the Medium enterprises.In regard to the micro and small enterprises such restructuring done according to RBI norms, the review mechanism can be with the zonal committees set up under the RBI circular No.338 of the 7th March 2016. After all several NPAs are like spreading a thin cloth on a fence and the cloth has to be taken out without being torn. Dexterous handling by bankers with a positive inclination is the need of the hour. There is no use crying over split milk. Hold the glass well and gulp the milk by sweetening it '' is my advice to the bankers and the RBI should help the process.

SuchindranathAiyerS

11 months ago

Bad Debts have moved from Non Performing Assets to Stressed Assets. The great contribution of a Madison Avenue driven USA and its MBA driven Banking system and Princeton, Wharton, Harvard, Columbia driven Junk Bond Economics is "change but no change" through the invention of Jargon. The Bretton Woods worshiping RBI dare not differ.

Indian Banking has evolved though Nationalization and Neta-Babu-Judge-Cop-Crony Kleptocracy intervention from CAIIB and AIB to MBA.

Why can Indian Banking not move from Hair Cuts to Tirupathi? A scalp shave might be the right place to begin. After hanging all the Kleptocrats, of course.

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11 months ago

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