RBI may tighten SDR norms to avoid misuse by banks

The past few months have seen a flurry of activity by the banks who have been invoking strategic debt restructuring (SDR) provisions, which allows them to effect change in ownership and avoid asset classification by 18 months. Sources tell CNBC-TV18 that the Reserve Bank of India (RBI) is keeping a close tab on all SDR cases reported so far and may tighten SDR guidelines to ensure the tool is not being misused by banks to defer or avoid provisioning.According to RBI guidelines on strategic debt restructuring, the tool was provided to banks for effecting change in ownership in cases of managerial inefficiencies.Once invoked, SDR allows debt in the process to be classed as "standard", without attracting extra provisions or writedowns, for 18 months. Unlike in cases where a loan is classified as NPA and banks have to set aside money to cover the risk of default which hurts their profitability, SDR gives them the cushion of 18 months to find a buyer and retain asset classification until that time, hence saving them the higher provisioning.In certain cases, a source told CNBC-TV18, especially in steel accounts, SDR was invoked even though the stress in the account was not a case of managerial inefficiency, but due to the external environment.To ensure there is no misuse of this powerful tool, RBI is mulling various options to tighten the SDR guidelines such that it is invoked only in genuine cases. Sources indicate that RBI is mulling retrospective-provision penalty for banks that don't find promoters in 18 months. This means that banks will have to make the same amount of provisions for the SDR account for the entire 18 month period as they would have been required to do for a non-performing asset to ensure that the problem is not being camouflaged.The past few months have seen a significant pick-up in activity under the SDR tool. So far, banks have invoked SDR in nine cases with an aggregate debt of Rs. 57,000 crore, or a percent of system loans. Some of India's largest banks have taken advantage of the benefits of SDR, but not one has yet used it to effectively tackle the underlying problems.Earlier this week, RBI Deputy Governor SS Mundra said it was too premature to say whether the SDR window was functioning or not. "They (banks) have been given a window of 18 months. At this point of time, they are putting SDR in cases which are eligible. I think it's premature to say they (banks) are unable to find buyers," he said.