Scheme for Sustainable Structuring of Stressed Assets (S4A)

October 4, 2016 October 4, 2016

The Reserve Bank of India (RBI) has issued guidelines called Scheme for Sustainable Structuring of Stressed Assets (S4A) as an optional framework to manage bad loans. The scheme is the latest measure taken by RBI to tackle stressed assets.

What is S4A?

Under this scheme, large ticket loans are restructured by separating a sustainable loan from an unsustainable loan. The lenders are required to make this classification. Sustainable level of debt is one which the banks think the stressed borrower can service with its current cash flows. This sustainable level of debt should not be less than half the loans or funded liabilities of the stressed entity. Banks can convert the unsustainable debt into equity or equity related instruments, which are expected to provide upside to the lenders in case the borrower cannot regain the glory and rework the financial structure.

The main aim of S4A:

Strengthen the lenders’ ability to deal with stressed assets
Put real assets back on track of entities facing genuine difficulties by providing an avenue for reworking financial structure.

Caveats

Moratorium cannot be offered by the banks on the sustainable part of the debt.
Banks cannot extend the repayment schedule of the debt or reduce the interest rate on the debt.
While converting the debts into equity or equity related instruments, the banks must follow the valuation criteria laid down by RBI.

Who can make use of these guidelines?

All Scheduled Commercial Banks (Excluding RRBs)
All-India Term-lending and Refinancing Institutions (Exim Bank, NABARD, NHB and SIDBI)
Non-Banking Financial Companies
Securitisation Companies/ Reconstruction Companies

Which accounts will be eligible under this scheme?

The project should have commenced commercial operations.
The aggregate exposure (including accrued interest) of all lenders to the company is more than Rs. 500 crore.
The debt should meet the test of sustainability. Through a techno-economic viability (TEV) study, an external consultant has to ensure the viability of the project. The promoter has to obtain a clean chit from the forensic audit.

What is the role of Overseeing Committee (OC)?

The Overseeing Committee will be constituted by Indian Banks Association (IBA) in consultation with RBI and will comprise of eminent persons. The loan for S4A can be approved only after getting the endorsement of the OC. The OC will review the resolution plan submitted by the lenders and check for reasonableness before giving its opinion. The OC will function as an advisory body.

Why there is a need for S4A?

Non-Performing Assets (NPA) for the fiscal year 2015-16 has touched Rs 6 lakh crore. It is likely to further increase in the coming months.
RBI wants the banks to clear their books by March 2017.
The scheme can restore the flow of credit to crucial sectors of economy like infrastructure, iron and steel etc.

What are the pros of S4A?

The new guidelines will help banks to manage their NPAs.
It will help banks to speed up the asset recovery process as they are required to clear their books by March 2017.
Borrowers will get another opportunity to rework its financial structure.
Oversight of an external Overseeing Committee (OC) will ensure transparency and save the banks from undue scrutiny from enforcement agencies.

What are the other measures taken by RBI to manage bad loans?

5:25 scheme

This scheme was introduced in December 2014. Under this scheme, RBI allows the lenders to extend the maturity of loans to projects in the infrastructure and core industries sector, for 25 years.

Strategic Debt Restructuring scheme (SDR)

This scheme was introduced in June 2015. Under this scheme, banks can convert a part of the debt of the stressed entity into majority equity. This scheme offers the banks to run the management of the stressed entity.

How S4A addresses some of the challenges of 5:25 and SDR schemes?

Unlike in 5:25 scheme, S4A scheme allows banks to convert the unviable portion of the debt into equity.
Unlike in SDR, banks need not find a new buyer within specified time period to sell the stakes. S4A offers longer duration for turn around and allows banks to benefit from an increase in equity valuation.
Unlike SDR, existing promoters can continue to hold majority stake and makes S4A more preferable than SDR.
Unlike in other schemes, under S4A banks can hold the preferable optionally convertible debentures instead of equity.

What are the limitations?

S4A scheme can only be applied to operational projects and not to the projects under construction.
Many of the entities may not be able to service sustainable part (half of their debt) of the debt with their current cash flows. As there exists low level of cash flow in entities belonging to vulnerable sectors like infrastructure and iron & steel, the number of stressed loans that could benefit from the scheme would be very low.
S4A does not allow rescheduling of original tenure of repayment of debt.
The involvement of external agency (Overseeing Committee) may slow the process.
Banks will not be able to extend support to the sustainable part of the debt.
There is a possibility of high level of equity dilution which may discourage the promoters to turn around the company.