Scheme for Sustainable Structuring of Stressed Assets
S4A is another loan restructuring scheme, meant to release the pressure of NPAs over Banks and allow them to revive their lending cycle so that the economy does not get hurt.
Under S4A, Banks will be allowed to convert up to half the loans held by corporate borrowers into equity or equity-like securities.
The move is intended to help restore the flow of credit to crucial sectors such as infrastructure and iron and steel, among others, reduce the stress on corporate borrowers and stanch bad loans across banks.
Banks will be allowed to rework stressed loans under the oversight of an external agency, thereby ensuring transparency while also protecting bankers from undue scrutiny by investigative agencies.
“The S4A 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”. In simple terms, a bank can determine the amount of debt that it thinks a firm can service with its current cash flows. This proportion of debt must not be less than half the loans or funded liabilities of the company. Once the sustainable level of debt has been determined, banks can convert the rest of the debt into equity or quasi-equity instruments.
Lenders will have to make provisions to the extent of 20% of the total outstanding amount or 40% of the amount of debt that is seen as unsustainable.
According to the scheme, any project which has commenced commercial operations and has an overall exposure of more than Rs.500 crore, including unpaid interest, can be brought to this platform, provided the bankers are convinced that the project can service the debt in the longer run. An independent techno-economic viability study can establish this. The banks will also work under the oversight of an external agency, ensuring transparency. This agency will protect the bankers from unwarranted scrutiny by the Central Vigilance Commission and the Central Bureau of Investigation.
Unlike CDR, S4A does not allow the banks to offer any moratorium on debt repayment; they are also not allowed to extend the repayment schedule or reduce the interest rate.
The gross bad loans of 39 listed Indian banks rose in fiscal year 2016 to Rs.5.79 trillion even as after provisioning, the net bad loans more than doubled to Rs.3.38 trillion. In percentage terms, the average gross non-performing assets (NPAs) of this group of banks rose from 4.41% of loans in 2015 to 7.91% in 2016; net NPAs in the past one year rose from 2.45% to 4.63%. Public sector banks, which have close to 70% market share of loans, are more affected than their private sector peers.
Only those projects that have started commercial production can take advantage of this scheme. There are many projects, particularly in the power sector, which have not yet started commercial production for lack of regulatory clearances and/or fuel linkages; they will remain outside its ambit.