Tweaking S4A norms may give banks a breather

In yet another desperate attempt to lift banks out of the morass of stressed loans, the RBI has offered some leeway to banks while restructuring loans under the Scheme for Sustainable Structuring of Stressed Assets, or S4A.

The scheme, launched in June, allows banks to convert up to half the loans of stressed corporates into equity or equity-like instruments. A bank will have to decide on the ‘sustainable’ portion of the debt. The rest can be converted into equity.

The RBI has now allowed the sustainable portion of the debt to be treated as a standard asset in all cases, subject to certain conditions. While guidelines will be issued by this month-end, the leeway will offer relief to banks in terms of provisioning and ease up capital to an extent.

The S4A applies to projects that have commenced operations and where the total exposure of all lenders in the account is more than ₹500 crore. The sustainable portion of the loan (not less than 50 per cent of the debt) is decided based on what the corporate borrower can service against existing cash flows.

The central idea behind the scheme was to identify that portion of the debt that may not be sustainable — not serviceable — over the long run even if the economy revives. This is imperative because debt levels of certain large corporates in sectors such as power and iron and steel have reached unsustainable levels. Now, with banks in effect taking a 50 per cent haircut on loans by converting unsustainable debt into equity, the downsizing of loans could attract potential buyers for these stressed entities.

But the scheme came with riders, which posed challenges. For one, the norms did not offer any respite to banks on the provisioning front.

In case where there is no change in promoter, and the asset is classified as standard (not NPA), the RBI had allowed banks to retain these assets as standard but banks had to make upfront provisioning of 40 per cent of the unsustainable debt or 20 per cent of the total debt (whichever is higher). In case where the asset is classified as NPA, banks had to make necessary provisions as per the current norms on both sustainable and non-sustainable portion of the debt. This is where the RBI is trying to offer some leeway to banks.

By allowing banks to treat the sustainable portion of the debt under all cases as standard, the RBI has lowered the provisioning requirement to some extent. This will also incentivise banks to take efforts to revive the stressed account, which if declared NPA, does not usually happen. From the borrowers’ point of view, there is more incentive to try and keep service the account if it is not declared an NPA.

While details are awaited, the necessary leeway can help banks deal with stressed assets better. However, the concern over banks misusing the tool remains, and it is for the RBI to ensure that leeway is provided only for genuine borrowers.

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