Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster
  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Will Loan Restructuring Makeover Impact NPAs?
Tue, 15 Nov Pre-Open

Amidst the din on demonetization, the Reserve Bank of India (RBI) on Thursday eased the rules for various stressed asset resolution schemes. It in fact expanded the scope of a loan recast plan previously limited to the infrastructure sector.

Strategic debt restructuring is a new mechanism introduced by the RBI in order to deal with Non-Performing Assets (NPAs). The scheme will also banks to recover their loans by taking control of the distressed listed companies. This is done to revive stressed companies and provide lending institutions with a way to initiate change of management in companies; which fail to achieve the milestones under the Corporate Debt Restructuring (CDR).

RBI also streamlined the process for change of ownership of stressed assets outside of the so-called strategic debt restructuring (SDR) process, which allowed creditors to convert debt into equity and take over the management of defaulting companies. RBI has given lenders additional time up to 180 days for hammering out a restructuring package under the scheme for sustainable structuring of stressed asset (S4A). Previously, the time limit was 90 days.

One of the significant changes made to the SDR scheme is that the new promoter should have acquired at least 26% of the paid-up equity capital of the borrower company. Also, the regulations state the new promoter of the company will also be in 'control' of the borrower company.

RBI has also made changes to schemes that allow banks to extend the repayment schedule of loans to 25 years, with the option to refinance at the end of five years.

In the so-called 5/25 scheme, which allowed loan repayments to be deferred, RBI has increased the coverage to all sectors. It has also allowed smaller projects-where banks have at least Rs 2.5 billion exposure to qualify for this scheme. Earlier, this was Rs 5 billion.

Not to mention, in another circular, RBI has also diluted the provisioning of the S4A scheme. The unsustainable part of debt in any S4A whether the account was NPA or standard at the time of restructuring could be upgraded to standard, if the sustainable half of the debt performed satisfactorily for one year. Banks would also be allowed to reverse all provisions made when the unsustainable half of the debt is upgraded. However, in all cases, the required mark-to-market provisions on instruments after conversion of unsustainable debt must be maintained at all times.

To conclude, the revision in norms gives banks relief from incremental provisions and allow lenders to dig into the provisions already made. Similarly, in view of the substandard performance of CDR mechanism, the SDR scheme seems a right step by the RBI to put pressure on defaulting borrowers. However, it needs to be seen whether the SDR scheme will be able to make willful defaulters repay the loans or risk losing the ownership of their companies.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

Read the latest Market Commentary

Equitymaster requests your view! Post a comment on "Will Loan Restructuring Makeover Impact NPAs?". Click here!


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jan 19, 2018 (Close)