Several efforts were made by the RBI and the government to fight bad debts of banks. The Debt Recovery Tribunal, Asset Reconstruction Companies are some of them. Similarly, the Strategic Debt Restructuring (SDR) is an attempt to revive stalled projects by giving equity participation to banks in such projects. Converting debt to equity is the main approach under the SDR. A similar scheme was launched by the Reserve Bank of India (RBI) on 13 June 2016, named as Scheme for Sustainable Structuring of Stressed Assets (S4A Scheme) for addressing the large stressed assets of the corporate sector with banks.
The S4A Scheme aims at deep financial restructuring of big debted projects by allowing lender (bank) to acquire equity of the stressed project. In this context, the scheme makes financial restructuring of large projects at the same time helping the lender’s ability to deal with such stressed assets. It is intended to restore the flow of credit to critical sectors including infrastructure. Following are the main features of the scheme:
1. 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).
2. The lending bank should hire an independent agency to evaluate how much of the debt is ‘sustainable’.
3. The project should have started its commercial operations and there should be cash flows from the project.
4. The project allows banks to take equity participation in the stressed project.
5. 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.
6. The 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.
7. The scheme involves substantial write-downs and/or making large provisions.
Difference between Strategic Debt Restructuring Scheme and S4A scheme
Under the S4A Scheme, banks would be to allow existing promoter to continue in the management even while being a minority shareholder. Whereas in the case of SDR, the promoter is delinked and ownership is changed. Similarly, under the S4A Scheme, the lenders also have an option of holding optionally convertible debentures instead of equity, which might be more preferred option. But in the case of SDR only equity holding is allowed.