RBI releases guidelines for structuring stressed assets

Moneycontrol BureauThe Reserve Bank of India (RBI) today released a paper on stressed assets called Scheme for Sustainable Structuring of Stressed Assets. The main aim of this paper is to “strengthen the lenders’ ability to deal with stressed assets and to put real assets back on track by providing an avenue for reworking financial structure of entities facing genuine difficulties.” The Reserve Bank will facilitate the resolution of large accounts which meets certain criteria. Those accounts facing severe financial difficulties might be put for restructuring or some write-down or larger provisions can be allowed, mentions the paper. The paper describes resolution plans that can be implemented to service the debt. An Overseeing Committee (OC) will be formed by the Indian Banks’ Association (IBA) in consultation with the Reserve Bank for overseeing the stressed assets cases. Eligible Accounts  The paper mentions certain guidelines to choose accounts that will fall under this. Accounts that have commenced commercial operations. Projects in which institutional lenders have exposure of more than Rs 500 crore. The amount will include any accrued Sustainable Debt The paper goes on to define sustainable debt as that where the Joint Lenders Forum or consortium of financial institutions believes that the existing loan can be serviced or can be retained at the existing level. But, for this scheme, the sustainable debt cannot be less than 50 percent of current funded liabilities. RBI also states that resolution may involve the current promoter to continue holding her stake in the company or some new promoter can be brought via the structural debt restricting (SDR) or non-SDR route. However, sustainable structuring is not permissible where promoters’ malpractices or wrongdoings have been revealed under audit. Under the new scheme, banks will have to divide the borrower's debt into two parts - Part A and Part B. Part A will be the debt amount that can be serviced including any new funding that may be required within six months and non-funded credit facilities whereas the debt that cannot be serviced will be classified under Part B.

Promoters will have to provide personal guarantee for sustainable part of the loan.

Resolution PlanThe report also mentions that no moratorium will be granted to unsustainable debt as well as no extension will be given for repayment of principal or interest amount. Part A of the loan will need to have the same amount of security cover as was prior to resolution. Part B debt, on the other hand, can be converted into redeemable cumulative or convertible preference shares. Banks will also have the option to convert the debt into optionally convertible debentures. For Part B, the report mentions guidelines for fair valuations. In case of equity, the share in the bank’s portfolio will be marked to market on daily or weekly basis. In case the shares are not listed on stock exchanges, they should be valued at the lowest using methods like discounted cash flow and break-up value. The bankers can obtain promoters’ personal guarantee for the sustainable part of the loan. In a situation where the resolution does not involve a change in promoter, the principle of proportionate loss sharing by promoters will stand. In such a case, existing shareholders will have to dilute their holdings. For the resolution plan to be passed, consent from 75 percent lenders by value and 50 percent lenders by numbers in JLF or consortium will be needed. Once the resolution plan is decided, it will go to the OC.Once the resolution plan is approved by OC, it will be binding on all lenders. However, lenders will have the option to exit JLF and correction action plan.