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RBI just made it easier for banks to handle bad loans; here’s how


The Reserve Bank of India (RBI) announced the Scheme for Sustainable Structuring of Stressed Assets (S4A) on late Monday evening which will help banks resolve bad loans of large projects.
Here’s how RBI proposes to do that:

Under the S4A, a portion of the debt will be converted into equity or other instruments under supervision of Indian Banks’ Association’s Overseeing Committee.

Ths S4A will be an optional framework for resolution of large stressed accounts and “envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around,” the RBI said.

It will cover those projects which have started commercial operations and have an outstanding loan of over Rs 500 crore.

To ensure transparency, an Overseeing Committee, set up by the Indian Banks Association and comprising of eminent experts, will independently review the processes involved in preparation of the resolution plan. This panel will be set up in consultation with the RBI.
Under the plan, the debt will be divided into two parts:

Part A will include debt which can be serviced from the existing operation while remaining will be classified as Part B. While there will be no extension of the repayment of Part A, the Part B will be converted into equity/redeemable cumulative optionally convertible preference shares.

In the cases where the resolution plan does not involve change in promoter, banks may, at their discretion, also convert a portion of Part B into optionally convertible debentures.

RBI said the S4A has been issued in order to further strengthen the lenders’ ability to deal with stressed assets and to put real assets back on track by providing an avenue for reworking the financial structure of entities facing genuine difficulties.

“Resolution of large borrowal accounts which are facing severe financial difficulties may, inter-alia, require co-ordinated deep financial restructuring which often involves a substantial write-down of debt and/or making large provisions. Often such high write-downs act as a disincentive to lenders to effect a sustainable change in the liability structure of borrows facing stress,” the RBI said.

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