RBI S4A Policy and its effect on Power Sector
Constant efforts are made by the Reserve Bank of India (RBI) and the government to fight bad debts of banks. Continuing these efforts, RBI has introduced “Scheme for Sustainable Structuring of Stressed Assets” (S4A) on 13 June 2016 (Reference: Circular | Guidelines). It is outlined to tackle the ‘problem loans’ of large projects at a sufficiently early stage and protect the interest of lenders. Hence, the motive is to strengthen the lenders’ ability to deal with stressed assets and to put real assets back on track by providing an avenue for reworking the financial structure of entities facing genuine difficulties.
Salient Features of S4A:
- For an account to be eligible for restructuring under the S4A Scheme, the total loans by all institutional lenders in the account should exceed Rs 500 crore (including rupee loans, foreign currency loans/external commercial borrowings).
- The lending bank should hire an independent agency to evaluate how much of the debt is ‘sustainable’.
- The project should have started its commercial operations and there should be cash flows from the project.
- The project allows banks to take equity participation in the stressed project.
- Test of Sustainability:
Major feature of the scheme is that it envisages determination of the sustainable debt level for a stressed borrower. Loans will be divided into sustainable and unsustainable components.
A Techno-economic viability (TEV) study by the bank/ Joint Lenders Forum/consortium of lenders should assess the debt level as sustainable. A sustainable debt is the one where the principal value of all debts owed to institutional lenders can be repaid if the future cash flows (return from the project) remain at their current level. For the scheme to apply, sustainable debt should not be less than 50 percent of all debts.
Sustainable Debt: The resolution plan may involve one of the following options with regard to the post-resolution ownership of the borrowing entity:
- The current promoter continues to hold majority of the shares or shares required to have control;
- The current promoter has been replaced with a new promoter
- The lenders have acquired majority shareholding in the entity through conversion of debt into equity either under SDR
Balance between Sustainable and Unsustainable Debt
6. Scheme allows banks to rework stressed loans under the oversight of an external agency. This ensures transparency at the same time protecting bankers from undue scrutiny by investigative agencies.
Stress Level on Power Sector
Several power projects are facing cost overrun issues due to implementation delays. Financial closure has become difficult due to commercial banks reaching their sectoral lending limits and the cap imposed on cost overrun funding by the RBI. In addition, equity capital from developers has become scarce due to a general slowdown in the economy. Over the last three to four years, the power sector had been adversely impacted by the lack of land availability and environmental clearances. As a result, these projects get stuck. Debt repayment as per schedule becomes difficult, leading to mounting bad loans in the sector.
Under Procurement of power by states, Fuel concerns, financial condition of state discoms and Under recovery of costs are another major reasons stimulating the level of stress in the sector. As per experts, there are stuck financial resources of about 3000 billion – 4000 billion Rs in the sector, which account to be nearly 3% of India’s GDP. As per a Reserve Bank of India report, Banks industrial credit was nearly 26 trillion as on 20 January 2017, out of which share of power sector is highest accounting 21%. Hence, the stress level in Indian power sector has reached to significant high levels and Schemes like S4A was need of the hour.
The Expected Effect
The new guidelines will help banks to manage their NPAs. It will help banks to speed up the asset recovery process as they are required to clear their books . Borrowers will get another opportunity to rework its financial structure. Oversight of an external Overseeing Committee (OC) will ensure transparency and save the banks from undue scrutiny from enforcement agencies.
Better than earlier schemes:
- 5:25 Scheme
This scheme was introduced in December 2014. Under this scheme, RBI allows the lenders to extend the maturity of loans to projects in the infrastructure and core industries sector, for 25 years.
- Strategic Debt Restructuring Scheme (SDR)
This scheme was introduced in June 2015. Under this scheme, banks can convert a part of the debt of the stressed entity into majority equity. This scheme offers the banks to run the management of the stressed entity.
In the case of SDR, lenders have to convert their outstanding loans into majority equity stake. In most cases large corporates may not be willing to let go of the full control. Under S4A, banks can step in as minority shareholders. The concern over banks misusing the restructuring tool under SDR has also been mitigated to some extent due to the upfront provisioning under S4A. Also, there is more transparency under the new scheme as the resolution will be reviewed by an overseeing committee, set up by the Indian Banks’ Association, in consultation with the RBI.
Challenges and the way forward
More and more financial institutions as well as owners of stressed asset in the Power Sector are expected to take advantage of the scheme and convert their debt to equity creating more distressed assets. But few bottlenecks in S4A guidelines mentioned below may create hindrance to expectation especially for power firms.
- Scheme applicable only for operating companies and not for stalled projects
- Techno-viability study takes only six-months’ cash-flows into account
- Banks not allowed to elongate “sustainable” part of loan
- Promoters against giving personal guarantees
Broking firm Kotak Institutional Equities gives its views regarding matter saying, “Banks have taken significant mark down of debt in the steel sector. So, there would be positive developments from this book but this will be offset by weakness in the power sector as that portfolio has not seen any stress from a reporting perspective.”