RBI does well to soften rules on SDRs for banks
While banks using the strategic debt restructuring (SDR) scheme have identified close to 20 companies that are in trouble, they haven’t managed to close out any deals just yet. That is not for want of trying; the environment is difficult and there are virtually no takers for steel-makers or textile producers. Which is why it is just as well RBI has tweaked the norms to allow lenders to upgrade such exposures to a ‘standard’ asset even if they are able to sell 26% of the stake to a new promoter and not 51%. However, upgrading the account to ‘standard’ is cosmetic since the provisions made for these stressed accounts cannot be reversed until repayments are on track. Nevertheless, that should not put off lenders since the new rule leaves them with a chance of making some money if the company does eventually recover because the value of their shares would be higher. Indeed, they would not also mind making the additional provisions necessitated by marking-to-market the value of the shares and also for the remaining portion of the debt.
To be sure, their bottom-lines will be dented but as RBI has been saying it is better banks recognise the stress on their books upfront rather than take a hit later. As part of its effort to clean up banks’ loan portfolios, RBI had put in place the mechanism of a Joint Lenders’ Forum (JLF)—a small group of bankers from the consortium that initiates speedy action if a problem is red-flagged. However, the system hasn’t been as effective as it should be, thanks to lenders pursuing their own interests rather than working as a team. Apart from ruling that the team should comprise senior executives empowered to take decisions, RBI has now made decision-making easier by saying that if 50% of lenders within the JLF approve an action plan—instead of 60% earlier—it can be initiated. Given how promoters can be slippery customers, and how the legal system is stacked against lenders, banks need to stick together—else, valuable assets will turn into scrap, leaving them with little chance of recovering their dues.