Most corporate defaulters won’t be able to resolve their bad debt issues through the Scheme for Sustainable Structuring of Stressed Assets, the latest stressed debt resolution mechanism from the Reserve Bank of India. Bankers are sceptical about going for the scheme as most of the companies are not eligible for the scheme with stringent guidelines acting as dampeners.
According to bankers, though the aim of S4A guidelines is to strengthen the lender’s ability to deal with stressed assets, the eligibility criterion filters out many companies to be unqualified. “Right from the point of identification of the asset subjected to this scheme till the point of implementation is an arduous process and being untested lacks hardnosed trail,” says a CARE Rating report.
The scheme goes by the thumb rule of certain parameters applicable to across all the sectors, but in real terms every sector has its own nuance of black spots inhibiting their growth, thus the current scheme does not address such issues but is primarily an another formulae-driven financial engineering tool. “With all the aforesaid factors, the actual implementation of the S4A tool and fructification of the expected results are yet to be seen,” it says.
According to an SBI official, S4A can only be applied when the sustainable debt is above 50 per cent. “If you take only the current cash flows, then it is really difficult to come out with projects which have 50 per cent. You may need to take it to 55-60 per cent. If you’re projecting only on the basis of current cash flows, then you’re not taking into consideration their interest flows, which will go down when you do the cut in the debt,” he said.
“Therefore, they’ll have better ability to ramp up capacity. You’re not taking the upside on it at all, to that extent there is an issue. If you want to take the upside, then the sustainable debt may go to 70 per cent or 80 per cent. These are questions we’re looking at. S4A requires a forensic audit, we’ve received the studies in 1-2 cases. Next month the report will be with us and we’ll know whether it is doable in current form or not,” he said. S4A was unveiled to tackle the challenges posed by 5:25 and Strategic Debt Restructuring (SDR) schemes.
The S4A set offs the weaknesses embedded in 5:25 and SDRs schemes, but the eligibility criterion filters out many companies especially the project stage ones thus leaving very few companies to be qualified. S4A does not allow rescheduling of original tenure of repayment or restructuring of the debt with better interest rates considering the projected improvement in liquidity post to implementation of the scheme. In order to determine Part A debt, the S4A scheme does not factor incremental cash flows which the company may be deriving through improvement in industry environment in which it is operating.
As per the Financial Stability Report published by RBI in June 2016, a macro stress test of sectoral credit risk revealed that in a severe stress scenario, among the select seven sectors (such as iron & steel, infrastructure, cement, agriculture, construction, engineering and automobiles), iron and steel industry (which had the highest GNPA ratio at 30.4 per cent as of March 2016) could see its GNPA ratio moving up to 33.6 per cent by March 2017. Since February 2016, the iron and steel sector has seen some respite on account of introduction of Minimum Import Price (MIP) which is expected to be lifted during October 2016. Though there is severe pressure to extend the same but the recurrence of the boon to the sector remains bleak on account of possibility of violation of WTO agreement terms. This situation of the sector chips of 30 per cent of GNPA from qualifying for this scheme, CARE said.
“Banks have to pay their price,” said a banking source. Banks would be required to set large amount of provision (higher of 40 per cent of the Part B amount or 20 per cent of the aggregate outstanding debt) as part of this scheme, which would deeply affect not only the value of the loan but also the profitability of the banks. Furthermore, the ability of lending of the banks may by trimmed due to higher provisioning and blockage of the advances in the form of equity/quasi equity in the subjected company for this scheme.
The only major S4A proposal initiated by banks is the debt of HCC. This doesn’t mean banks have cleared S4A for HCC. Lenders will get 90 days from ‘reference date’ to formulate the resolution plan and implement the same, along with necessary internal approvals. HCC has a debt of over Rs 11,000 crore.
Banks, which are racing to clean up their balance sheets have come out with a whopping 96 per cent jump in non-performing assets to Rs 629,774 crore as of June 2016 as against Rs 320,553 crore in the same period last year. The sharp rise follows the Reserve Bank instruction to banks to classify around 130 stressed accounts as NPAs and make adequate provisioning for them.
State Bank of India led the list with its gross NPAs soaring to Rs 101,541 crore during the June quarter from Rs 56,420 crore in the year-ago period. For this quarter, the gross NPAs of banks had almost doubled (96 per cent) with the ratio of gross NPAs to advances increasing sharply from 4.6 per cent to 8.5 per cent of their advances.