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RBI tweaks SDR norms; banks to keep provisions of 15% of the loans value

26 Feb 2016 Evaluate

Reserve Bank of India (RBI) based on feedback received from stakeholders has partly modified and also clarified, some aspects of its Prudential Guidelines for Revitalising Stressed Assets in the Economy. Many of the stakeholders had sought more flexibility on difficulties being faced with both the JLF and SDR, the mechanisms introduced by the central bank as an alternative to the corporate debt restructuring forum.

The apex bank has asked banks going in for strategic debt restructuring (SDR) scheme to make sufficient provisions to the tune of 15 per cent of the loans value, to tide over possible loss in the value of the equity they acquire in lieu of debt and residual loans. The RBI said it is possible that the lenders, after invoking SDR in an account, may not be able to sell their stake to new promoters within the 18 month period, thus revoking the 'stand-still' benefit, which may result in sharp deterioration in the classification of their remaining loan exposures from what prevailed on the 'reference date'.

The required provision should be made in equal installments over the four quarters and it shall be reversed only when all the outstanding loans in the account perform satisfactorily during the 'specified period' after transfer of ownership control to new promoters.

At present equity shares acquired and held by banks under the scheme are exempt from the requirement of periodic mark-to-market. Noting that there is a possibility of banks facing a cliff-effect of provisioning at the end of the 18 month period on account of mark-to-market requirement or on account of recognising loss on sale of equity shares to the new promoters, RBI asked banks to periodically value and provide for depreciation of these equity shares as per IRAC norms for investment portfolio.

RBI also reiterated that the trigger for SDR must be non-achievement of the viability milestones and non-adherence to 'critical conditions' linked to the option of invoking SDR, as stipulated in restructuring agreement, and SDR cannot be triggered for any other reason. It also asked banks to do due diligence to make sure that the 'new promoter', to whom they divest their equity, should not be a person or entity or subsidiary or associate from the existing promoter or the promoter group.

The salient features of the Review of the norms are:

SDR:

i.Reduction in the minimum percentage of shareholding to be initially divested by the lenders;

ii. Lenders to build up adequate provisions for possible loss in value of the equity acquired in lieu of debt and residual loan exposures;

b. Framework to Revitalise the Distressed Assets in the Economy

i. Reduction in the percentage of lenders, by number, required to approve the Corrective Action Plan;

ii. Revised composition of the JLF-EG for enhancing the quality of decision making;

iii. A scheme of incentives for adherence to timelines for decision-making by JLF members to facilitate timely implementation of the Corrective Action Plan;

c. Restructuring of Advances

i. Permitting restructuring and benefits of asset classification in cases of borrower accounts, which were involved in fraud, where the promoters have been subsequently replaced by new promoters and the borrower is totally delinked from the erstwhile promoters;

ii. Clarifying that Flexible Structuring of Project Loans is also permitted for ECBs;

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RBI tweaks SDR norms; banks to keep provisions of 15% of the loans value

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