The Reserve Bank’s latest scheme to tackle bad loans — Scheme for Sustainable Structuring of Stressed Assets (S4A) — will benefit only a limited number of stressed accounts and it could take almost a year to see some impact on resolving the stressed assets problem, rating agencies and experts said.
“The S4A cannot be applied to all cases of stressed exposure. It can be applied to only operational projects and not to projects under construction. It does not allow for any rescheduling of original tenure of repayment or repricing of debt,” Crisil said. “Gross non-performing assets (NPAs) could come down after a period of one year as satisfactory performance of sustainable debt portion is established,” ICRA said, adding that gross NPAs could come down by 30-100 bps from current level of 7.7 per cent as on March 2016.
Crisil has estimated that weak assets in the Indian banking system will touch a high of Rs 8,00,000 crore by end of the current fiscal (March 2017). According to Crisil, sustainable debt under the scheme — which needs to be at least 50 per cent of total debt — is derived based only on the ability of current cash flows to cover debt repayment. “It cannot factor in incremental cash flows that could accrue as the external environment improves. Given the significantly low level of current cash flows of most highly leveraged companies in the vulnerable sectors such as infrastructure and iron & steel, the number of stressed loan accounts which could benefit from this scheme could be low,” Crisil said.
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Yet, despite the limitations, if implemented successfully, the S4A can strengthen the ability of lenders to deal with stressed assets, which have potential to be revived by providing an avenue for reworking the financial structure of entities facing genuine difficulties. This provides a lifeline to stressed corporates, while for banks it would curb additions to NPAs in the near-term, it said.
“As for provisioning requirement, while there would be no immediate relief to banks, the norms are likely to reduce incremental provisioning requirement over next 1-5 years substantially, provided sustainable portion of debt is serviced satisfactorily and there is no further decline in fair value of non-sustainable portion,” ICRA said. According to a Bank of America Merrill Lynch report, larger banks will benefit the most given the size of their NPAs. It termed this as a better scheme than the SDR given that the entire corporate debt need not be classified as NPAs and existing promoters can continue.
S4A is an improvisation over the two other tools announced by the regulator in the past 18 months to address asset quality challenges at banks: structuring of project loans under the 5:25 scheme, and strategic debt restructuring (SDR) and could help banks limit fresh slippages to non-performing assets (NPAs) from large corporate exposures, Crisil said. S4A envisages the determination of a sustainable debt level for stressed borrowers, and bifurcation of outstanding debt into sustainable debt and equity/quasi-equity instruments, which are expected to provide upside to lenders when the borrower turns around. It will cover projects that have started commercial operations and have outstanding loan of over Rs 500 crore. It enhances the transparency of the resolution process through the appointment of an external agency for technical evaluation and also oversight of an independent committee.
The 5:25 and SDR schemes have had their challenges which has limited their application across a larger set of stressed assets. The key challenge with 5:25 is that banks which structured loans under the scheme by stretching repayment periods had to mandatorily protect the net present value (NPV) of the loans refinanced. And under the SDR, banks had to take majority stake (51 per cent) in the stressed firm along with management control and also find a new buyer within a short span of 18 months from the reference date, failing which the asset is classified as a non-performing one.