RBI tweaks the SDR rule, stressed banks to benefit

Reserve Bank of India (RBI) on Thursday February 25, tweaked the strategic debt restructuring (SDR) norms in a move to provide banks with more support to deal with bad loan situation as many of the stakeholders sought more flexibility.

With revised guidelines, banks can upgrade an asset to the standard asset category if they divest at least 26 per cent of the stake to the new promoter within the specified period of 18 months. This is a significant departure from the previous norm of 51 per cent divestment within the same period. Lenders would thus have the option to exit their remaining holdings gradually, with upside as the company turns around. 

SDR is a scheme introduced by RBI in June 2015 to help banks recover their loans from the borrowers by converting loans into majority equity. After taking over the company, lenders will have 18 months from the date the SDR scheme is effective to find a buyer for the company. If banks fail to usher in a new promoter, the asset would be classified as a non-performing asset for the banks. SDR is significantly an important rescue tool which can be used to ease the financial burden on borrowers. 

Banks moved to use the SDR provision quickly, but have found it difficult to find ready buyers for the equity stake they now hold. The easing of norms to allow them to divest only 26 per cent within 18 months and the rest later will come as a relief for banks. 

While this one provision has been eased, other rules have been tightened. For instance, the equity shares acquired under the SDR mechanism will have to be periodically valued and the depreciation in the value of these shares will have to be provided. 

The banking regulator has also instructed banks to conduct necessary due diligence to ensure that a potential buyer is not a person/entity/subsidiary/associate of promoters, whose assets they dispose of. It also stated that personal guarantees or commitments obtained from existing promoters should also cover losses incurred by lenders. 

RBI also revised certain rules related to the Joint Lenders’ Forum (JLF) mechanism. As per revised rules, only 50 per cent of the lenders by number need to agree to a Corrective Action Plan (CAP) devised by the forum for a stressed asset. Earlier, 60 per cent of the lenders by number were required to agree to a plan for it to be implemented.

Also, in the earlier JLF framework it was stated that dissenting banks which did not want to participate in the restructuring or rectification in a particular case could find a new buyer for the loan and exit. According to the revised norms, if the dissenting lender is not able to find a new buyer, it would have to agree to the CAP and provide additional financing if it is part of the plan.

The tweaking of rules will come as a relief to banks and it will help them in finding buyers for their distressed assets. Since the SDR rules were introduced, lenders have converted debt to equity in a number of firms including Electrosteel Steels Ltd; Ankit Metal and Power Ltd; Rohit Ferro-Tech Ltd; IVRCL Ltd; Gammon India Ltd; Monnet Ispat and Energy Ltd; VISA Steel Ltd; Lanco Teesta Hydro Power Pvt. Ltd; Jyoti Structures Ltd; and Alok Industries Ltd.