The clean-up exercise of banks balance sheets is expected to gain momentum with the Reserve Bank of India stepping in to address bankers’ fears about their loan restructuring decisions being questioned by government agencies.

The central bank has got the Indian Banks’ Association to constitute an ‘Overseeing Committee’, comprising eminent persons, to vet their stressed asset resolution plans under the Scheme for Sustainable Structuring of Stressed Assets (S4A).

S4A has been unveiled in the backdrop of the RBI setting a March-end 2017 deadline for banks to purge their balance sheet of bad loans and their inability to effect change in ownership under the strategic debt restructuring (SDR) mechanism even after converting loan dues into equity shares in some companies. The extent of the bad loans problem can be gauged by the fact that in March 2016 credit rating agency Crisil had estimated that weak assets in the banking system could touch ₹8 lakh crore by March-end 2017, from an estimated ₹6.90 lakh crore as on March-end 2016. “Hitherto, we were living in constant fear that either the Central Bureau of Investigation or the Central Vigilance Commission or both will question legitimate commercial decisions, such as haircut, when a loan account was restructured. This cast a shadow on decision-making.

“But now with the IBA-constituted Overseeing Committee coming into the picture, such fears have been allayed and we can get on with the job of balance sheet clean-up in earnest,” said a public sector bank official.

Sustainable debt Under S4A, a debt level will be deemed sustainable if the Joint Lenders Forum (JLF)/consortium of lenders/bank conclude through independent techno-economic viability (TEV) that it can be serviced over the same tenor as that of the existing facilities even if the future cash flows remain at their current level. For this scheme to apply, sustainable debt should not be less than 50 per cent of current funded liabilities.

Unlike SDR, which envisages change in ownership after banks’ have acquired majority stake in a company upon conversion of debt into equity, the S4A allows some leeway to the current promoter whereby he could continue to hold shares required to have control.

ICRA said implementation of the guidelines will help bridge the gap between the actual expected losses and provisioning cover and therefore would be a credit positive.

It estimated that these may also help reduce the reported Gross Non-Performing Assets per cent by 30-100 basis points (from the current level of 7.7 per cent as on March 2016) after a lag of one year (following satisfactory performance of sustainable debt portion).

As for provisioning requirement, while there will be no immediate relief to banks, the norms are likely to substantially reduce incremental provisioning requirement over the next one-five years, provided a sustainable portion of debt is serviced satisfactorily and there is no further decline in fair value of non-sustainable portion, the agency added.

Also read: New debt recast norms offer limited relief to banks...

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