Will RBI Let Banks Kick The Bad Loan Can Down The Road Again?

07 November 2016

Two possible changes to a scheme for bad loan resolution could water down the tough stance taken by the Reserve Bank of India against stressed assets over the past two years.

Faced with more than Rs 6 lakh crore in loans that have already turned bad (and more that are stressed), the country’s lenders are lobbying hard for flexibility in rules under The Scheme For Sustainable Structuring of Stressed Assets (S4A), which is currently under review by the Reserve Bank of India (RBI).

One such change, which allows banks to classify the sustainable part of the loan as a standard asset as soon as the loan is restructured, is already in the works and final guidelines are awaited. A second change, which includes more flexibility in scheduling repayments on the sustainable part, is also under discussion, said two people familiar with the matter.

Put together, the two will mean that banks will have more incentive to restructure loans under the S4A scheme which, in turn, will allow them to bring down their reported level of non-performing assets. To be sure, banks would still take a significant haircut on the unsustainable part of the debt which means that the dilution will not be akin to the less stringently controlled corporate debt restructuring of yesteryear’s.

Yielding to industry requests, the regulator then introduced the S4A scheme which did not require a change in management but included some stringent conditions.

• One condition under S4A was that atleast 50 percent of the company’s debt should be seen as sustainable
• The sustainable part of the debt should be serviceable with existing cash flows
• The RBI did not allow any rescheduling of the sustainable portion of the debt
• The classification of the account should remain what it was before the restructuring for atleast one year
• The unsustainable part of the debt should be converted into long term equity-linked instruments

Bankers are now asking that two of those key conditions be diluted.

If the bankers’ proposals are accepted, two things may happen:

1) The immediate change in classification may incentivize bankers to push through S4A restructurings in large accounts as it will lead to a drop in their reported non-performing assets ratio. Provisioning requirements on these accounts will also come down.

2) By rejigging the payments for the sustainable part of the debt, stressed companies may be able to manage their cashflows better. On the flip side, it could just defer stress in some accounts to a later date.

Source – BQ