The Indian economy has passed through the most challenging times in recent history. The COVID-19 pandemic which primarily started as a health issue has transformed into a gigantic economic issue that is leading to far-reaching consequences. In a proactive response, the central government brought in a massive Rs 20 lakh crore economic stimulus, which is helping in the perceptible rebound, which the economy is now showing.
On the regulatory front, RBI has moved in tandem with the government and announced several measures to support growth and revival. This inter alia included a detailed resolution framework to take care of borrowers subjected to stress on account of COVID-19, which provides for a one-time debt restructuring scheme for corporate borrowers.
The commercial banks are in the process of scrutinizing, assessing and implementing the scheme, which is expected to provide a much-needed reprieve to the stressed borrowers and enable them to have a chance to move towards the revival path.
Corporates generally rely upon debt i.e. bank borrowings for setting up and expanding their businesses, by way of long-term loans for purchasing fixed assets and working capital loans for day-to-day functioning. Sometimes, the business may face a downward trend, difficult times and stress due to external and internal factors like business cycles, lack of demand, competition, technological changes, Government regulations and inadequacy of the promoter's own funds.
This will generally lead to the generation of inadequate cash flows, losses and inability to repay debt i.e loan installments and service interest on borrowing. Continuous default by borrower renders the account to be classified as a Non Performing asset.
Handling of stressed Borrower Accounts
Dealing with such stressed accounts requires deft handling by the lenders and is a challenging task. Over the period of time, under the watchful eyes of RBI, the mechanism of handling distressed assets has evolved in accordance with the changing circumstances and the requirements of the economy. The principle behind such an exercise is to have a timely and transparent action with an objective to support viable businesses, to preserve the economic value of the stressed assets.
The intent is to help all viable units to enable them to revive and generate better cash flows in the future, while at the same time ensuring promoters' commitment /contribution for such revival.
Restructuring of the debt is a fundamental option available, which is an act, in which a lender for economic or legal reasons relating to the borrower's financial difficulty grants concessions to the borrower. This will generally involve modifications of terms of existing sanction, which will inter alia include, alteration of payment period /payable amount /amount of installments/rate of interest, rollover of credit facilities.
Sanction of additional credit facility, the release of additional funds for an account in default to aid curing of default /enhancement of existing credit limits, compromise settlements where time for payment of settlement amount exceeds three months are also included in the definition of restructuring, as per RBI guidelines. Thus ample opportunity is provided to the borrower to survive and revive the business.
The entire exercise is to be done in a time-bound manner with proper techno-economic viability assessment and compliance with other norms and conditions as stipulated. In the past, various schemes/mechanisms have been announced to deal with specific conditions and circumstances e.g. CDR (Corporate Debt Restructuring), SDR (Strategic Debt Restructuring), S4A (scheme for sustainable structuring of stressed assets), etc.
A fresh set of comprehensive guidelines were issued by RBI in June 2019 on the prudential framework for the resolution of stressed assets, repealing various previous guidelines. The emphasis is on early recognition, reporting and time-bound resolution of stressed assets, independent credit evaluation, a collaborative approach among lenders through an inter-creditor agreement (ICA) and a transparent valuation mechanism of debt converted to equity instruments as a part of the resolution process. The lenders also need to make stipulated extra provisioning and ensure close monitoring of accounts
The actual solution varies from case to case depending on the gravity of stress and the specific causes there.
COVID-19 related stress
To deal with urgent requirements of the situation arising out of the covid19 stress, RBI brought out in August 2020 a special dispensation of one-time debt restructuring. Based on the recommendations of the VK Kamath committee, this scheme has stipulated five financial ratios to be complied with for 26 adversely affected sectors. However, it is felt that these financial parameters may be difficult to have complied in several cases.
Debt Restructuring is an essential element of the financial system. This provides a much-needed opportunity to the adversely affected stressed corporates to revive, by proving their resilience and viability. A collaborative approach, through a thorough assessment, well-thought-out strategies and structure can create a win-win situation for all stakeholders to sustain and create value for the stressed assets.
The author, Jyoti Prakash Gadia, is Managing Director at Resurgent India Limited. The views expressed are personal