All you wanted to know about S4A

Embattled members of India Inc such as Bhushan Steel would like to be considered for it. Air India has expressed the hope that the scheme will lighten its debt burden. Ever since the RBI announced the Scheme for Sustainable Structuring of Stressed Assets (S4A) in June, there’s been a long line-up of applicants knocking at the banks’ doors to avail of it. But so far, very few borrowers have made the cut.

The S4A is RBI’s latest attempt to try and chip away at the mountain of stressed loans smothering Indian banks. The scheme tries to strike a compromise between banks with problem accounts and corporate defaulters of the non-wilful variety, by converting a portion of large loan accounts into equity shares.

For a distressed company to be eligible for S4A, the RBI has laid down three conditions. The project must be operating and already generating cash. The total loans to the entity should be ₹500 crore or more. The lending banks are required to hire an independent agency to evaluate how much of the debt is ‘sustainable’. For the loan to be eligible for S4A, at least 50 per cent of it should be ‘sustainable’.

While RBI’s earlier ideas to resolve bad loans such as Strategic Debt Restructuring (SDR) required banks to oust existing promoters, S4A allows the incumbent management to continue, as long the default isn’t wilful.

The borrowing binge by Indian companies during the boom times from 2003 to 2008 has left Indian banks saddled with a large pile of bad loans. At last count, they amounted to 11.5 per cent of their total book. This pile of unpaid debt has led to big write-offs that have dented bank profits, gobbled up bank capital and made them wary of giving out new loans that can keep the wheels of the economy turning.

The RBI is thus keen to push banks to quickly resolve the problem accounts. Given that they come in all shapes and sizes, there’s no one-shot solution to all the different kinds of bad loans. The central bank is thus trying out a carrot and stick approach.

By straightaway allowing as much as half of the loan to be written off through conversion into equity, S4A gives corporate borrowers the opportunity to trim their debt pile and start afresh. Yes, banks are forced to take a haircut by giving up on one part of the loan. But they at least have certainty on the remaining loans getting repaid. Who knows? If the fortunes of the business turn, they may get to pocket gains on the free equity shares too.

Banks’ bad loan problems affect you both as an investor and depositor. Today, shares of many public sector banks trade below their book value, as investors aren’t sure if the ‘book value’ represents a realistic picture of their recoverable loans.

Schemes like S4A inflict short-term pain on banks by forcing immediate write-offs, but address such suspicions by putting a number to the likely recoveries. For depositors, especially in PSU banks, schemes like S4A provide clarity on how much of the loans are a lost cause. This in turn, may prompt the Government to fork out money to re-capitalise the bank.

While the S4A seems like a sweet deal, not many borrowers have been able to meet RBI’s condition on half the loan being recoverable. That should tell you just how bad the bad loan problem really is.

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