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Strategic Debt Restructuring scheme: ‘A solution, with its own problems’

SDR scheme introduced to help banks reduce their debt has its own share of loopholes and is only postponing lenders’ NPAs to later years, say experts

Written by Sunny Verma |
January 26, 2016 2:27:07 am
sdr, sdr scheme, rbi, rbi schemes, rbi banking shcemes, banking schemes, banking schemes rbi, rbi news, india news The SDR scheme provides banks significant relaxation from the RBI rules for 18 months.

Over the last six months, the Indian banking sector has been witnessing a rather novel experiment, with leading banks turning into majority owners and gaining management control of as many as 16 troubled companies in order to recover their loans worth over Rs 81,000 crore.

Banks have taken recourse to the Strategic Debt Restructuring (SDR) scheme, put together by the Reserve Bank of India last June wherein a consortium of lenders converts a part of their loan in an ailing company into equity, with the consortium owning at least 51 per cent stake. The SDR scheme provides banks significant relaxation from the RBI rules for 18 months.

Loans restructured under the scheme are not treated as non-performing assets (NPAs) and banks have to make low provisions of 5 per cent in most cases. The scheme allows banks to recognise interest accrued, but not due/paid as income. This enables banks to report lower NPAs and higher profits for 18 months.

By making banks majority owners and replacing the existing management, the scheme gives lenders the powers to turnaround the ailing company, make it financially viable and recover their dues by selling the firm to a new promoter. If banks are unable to sell to a new promoter within 18 months, then all regulatory relaxations cease to exist and lenders have to treat these assets as NPAs and make 100 per cent provisioning for these assets in majority of the cases. This could adversely impact their profitability in a big way.


The jury is still out on the effectiveness of the scheme. A section of analysts believe the SDR scheme is actually postponing banks’ NPAs to later years, as the lenders may find it tough, in most cases, to sell their stake in these companies, or be able to sell at steep losses within the 18-month window. The SDR scheme increases the risk by postponing NPAs, said a detailed note by Religare Institutional Research on January 4, analysing 15 SDR cases announced till December.

“This scheme is in no way a cure-all for Indian banks’ deteriorating asset health — instead it exacerbates the risk by deferring an estimated (Rs 1.5 lakh crore ) of NPA formation from (2015-16/2016-17) to later years,” Religare said, adding it expects many SDR cases to fail, resulting in high and chunky slippages in 2016-17 and 2017-18.
Nikhil Shah, managing director at Alvarez & Marsal India, a firm specialising in turnaround management and performance improvement of companies, said even though lenders may have prospective buyers in many SDR cases, the seriousness of the buyers is a question mark.

“In a few of the SDR cases, there may be a postponing of declaring the asset as non-performing, especially where the lenders have no firm buyer. However in a majority of the cases, there are actually buyers at the table. The question is how serious these buyers are and the valuation they are seeking,” Shah said. One key reason for this skepticism is the fact that most of the SDR cases are already stressed for last two years, since attempts to restructure these loans under the Corporate Debt Restructuring (CDR) mechanism did not yield positive results.


Gammon India: Stressed due to rising costs and mounting debt, this Mumbai-based infrastructure company approached the CDR Cell in March 2013. In June 2013, its debt restructuring package was approved, which provided a 10-year repayment plan and lowering of interest rate by 1 per cent for 15 months. Unable to revive the company via a CDR package, the lenders’ consortium evoked SDR in November 2015.

IVRCL: Losses resulting from debt-funded expansion projects forced this Hyderabad-based infrastructure company to approach the CDR Cell in January 2014. Its package was approved in June 2014 comprising of restructuring of term loans, working capital loans and fresh financial assistance by the banks. Failing to revive IVRCL through CDR, the banks invoked SDR in November 2015 with lenders owning 78 per cent equity in the company.

Electrosteel Steels: The firm took huge debt to fund its under-construction greenfield integrated steel and ductile iron pipes plant in Jharkhand. It approached CDR Cell in May 2013 after running into financial difficulties due the incomplete project. Led by SBI, a lenders’ consortium in September 2013 approved a package to restructure debt. When all the options to revive the company failed, lenders invoked SDR in July 2015.

Monnet Ispat: The company’s financial performance was adversely impacted over last 2-3 years due to steep fall in demand and pricing of steel products, closure of coal mines and increase in iron ore prices. Banks approved a CDR package in 2015 which offered a moratorium of 1.5 years from the scheduled commencement of the project. Bankers later invoked SDR in August 2015, as company did not meet performance milestones set under CDR.


The failure rate for the CDR restructured cases, according to Religare, has increased to 36 per cent in September 2015 from 24 per cent in September 2013. As per the CDR Cell data, it received 530 cases till March 2015 from banks seeking to restructure debt totaling Rs 4.03 lakh crore without classifying these accounts as NPAs. The debt burden of these companies have been mounting since 2013 when they went for restructuring to the CDR Cell. And upon conclusion of the SDR, debt level of these companies are expected to rise by 70 per cent since the date of first restructuring, Religare said.

So when banks actually go to sell their stakes at the end of 18-month SDR window, the debt of companies would have ballooned; making it difficult to attract new promoter or banks having to take significant haircut.

“The real issue is to sort out the debt problem in these companies. Only then can the banks look for good enterprise value for these assets, more so since the market capitalisation of such companies have largely eroded,” a banker said, asking not to be named.

Overall slowdown in the economy, crash in commodity prices and weak private investment also mean banks will face challenging times in selling their SDR stakes. Since most SDR cases announced so far are in risky sectors such as metals, power and capital goods, finding new buyers to pick up 51 per cent would be tough.

Ravi Shenoy, vice president, Mid-Cap Research at Motilal Oswal Securities said: “We have very limited experience with regard to SDR. We are yet to see how good, bad or ugly it would be. But for some sectors like metals, banks may find it very difficult to find buyers. In the power sector, again viability is a question, and banks will have to be more patient with these businesses.”

Problems with the scheme

There are three key issues with the SDR mechanism that need to be looked into to ensure its success.

FIRST is lenders’ consortium having to find a new promoter within 18 months of having acquired the company. In these 18 months, banks have to wrap up the entire process of initiating the SDR process, running the business and finding a new buyer.

“The 18-month window for lenders to find a new promoter is a short time period,” said Shah. The first 90 days involve invoking the SDR, valuing the company, conversion of debt to equity and so on, and banks need to prepare a restructuring plan, which has to be approved by all members of the lenders’ consortium, he said

Simultaneously, the lenders have to work on identifying a new promoter, who has to complete his due diligence, valuation and acquisition documentation of the company. So 18-months can be a short period to complete all the steps, Shah said.

“At the end of 18 months, if banks are not able to find a new buyer, then they have to provide for the loan outstanding from the date of the first restructuring. This means banks will need to provide for the asset over the past 3-4 years in one quarter. This can take a toll on banks’ profitability significantly. It is not advisable for banks to go for the SDR route, unless they are certain of a sale,” Shah said.

A leading banker, who is involved in SDR cases and did not want to be identified, said wrapping up the whole exercise in 18-months is a bit challenging, but it was early to conclude how effective will this tool be in dealing with stressed assets. Banks’ stressed advances ratio increased to 11.3 per cent in September 2015 from 11.1 per cent in March 2015, as per RBI data.

Another connected problem is that the SDR rules do not explicitly provide for a partial stake sale and banks have to sell their entire stake in the company to the new buyer. “For some SDR firms, particularly listed players, conversion of both CDR as well as SDR shares has left banks with more than 51 per cent holding (IVRCL — 78 per cent and Shiv-vani Oil and Gas — 83 per cent),” Religare report said. Finding buyers to pick up such large stake may be easier said than done.

SECOND tricky issue for the banks is managing these companies after becoming majority owners. An analysts involved in five SDR cases, not wanting to be identified, said the banks are currently using the existing managements to run the company, but with greater external monitoring and oversight. Banks have not completely changed the management in these five companies.

THIRD problem is that the new promoter may have to delist the company upon acquiring 51 per cent shares from the banks. As per the SDR rules, upon finding a new promoter, lenders must exit the firm. In such a case, the new buyer will take a 51 per cent stake and, in line with the Securities and Exchange Board of India rules, make an open offer for a further 25 per cent stake. If the open offer is fully subscribed, the buyer will own 76 per cent. Sebi rules mandate that any holding above 75 per cent must trigger a delisting.

Under the SDR scheme, banks are exempted from making an open offer while acquiring majority stake in a stressed company. But such exemption is not available to the new promoter, who may have to delist the company. To make the SDR mechanism successful, “banks have to discuss this with SEBI and seek an exemption from open offer for the new promoter,” Shah said.

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