The Reserve Bank of India (RBI) on Monday allowed banks to resolve stressed loans by bifurcating the sustainable portion of the debt from the unsustainable part and converting the latter to redeemable cumulative optionally convertible preference shares.
For this to apply, the project needs to have commenced commercial operations, its total exposure (including accrued interest) of all institutional lenders in the account is more than R500 crore (including rupee loans, foreign currency loans/external commercial borrowings,). In respect of an account that is standard as on the reference date, the entire outstanding (both part A and part B) will remain standard subject to provisions made upfront by the lenders being at least the higher of 40% of the amount held in part B or 20% of the aggregate outstanding (sum of Part A and part B).
According to RBI, a debt level will be deemed sustainable if the joint lenders forum (JLF) or the consortium of lenders concludes through independent techno-economic viability (TEV) that debt of that principal value among the current funded/non-funded liabilities owed to institutional lenders can be serviced over the same tenure 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% of current funded liabilities,” it added.
Following resolution, the current promoter could continue to hold majority of the shares or shares required to have control or could have been replaced with a new promoter either through conversion of a part of the debt into equity under SDR mechanism or outside SDR scheme.
However, the central bank added that where malfeasance on the part of the promoter has been established, through a forensic audit or otherwise, this scheme shall not be applicable if there is no change in promoter or the management is vested in the delinquent promoter.
“There shall be no fresh moratorium granted on interest or principal repayment for servicing of Part A (sustainable debt). For this scheme to apply, sustainable debt should not be less than 50% of current funded liabilities, as compared to repayment schedule and interest rate prior to this resolution,” it said.
The unsustainable portion shall be converted into redeemable cumulative optionally convertible preference shares.
“However, in cases where the resolution plan does not involve change in promoter, banks may, at their discretion, also convert a portion of Part B (unsustainable portion) into optionally convertible debentures,” the RBI said.
The equity shares in the bank’s portfolio should be marked to market preferably on a daily basis, but at least on a weekly basis. “Equity shares for which current quotations are not available or where the shares are not listed on the stock exchanges, should be valued at the lowest value arrived using the break-up value or discounted cash flow method where the discount factor is the actual interest rate charged to the borrower plus 3%, subject to floor of 14%.
The central bank said that an Overseeing Committee (OC), comprising of eminent persons, will be constituted by IBA in consultation with RBI. The members of OC cannot be changed without the prior approval of RBI. “The resolution plan shall be submitted by the JLF/consortium/bank to the OC. The OC will review the processes involved in preparation of resolution plan, etc. for reasonableness and adherence to the provisions of these guidelines, and opine on it,” it said.
In cases where the promoter remains unchanged, asset classification as on the date of lenders’ decision to resolve the account under these guidelines (reference date) will continue for a period of 90 days. “This standstill clause is permitted to enable JLF/consortium/bank to formulate the resolution plan and implement the same within the said 90 day period. If the resolution is not implemented within this period, the asset classification will be as per the extant asset classification norms, assuming there was no such ‘stand-still’,” RBI explained.