Govt, RBI may introduce gradation system to deal with bad debts

Banks to get more aggressive and act like PE investors

The government and the Reserve Bank of India (RBI) could introduce a gradation system in loan restructuring to deal with bad debts.

All schemes introduced by the central bank would be used, depending upon the provisioning requirement, and public sector banks would get to act like aggressive private equity players to recover dues. The central idea would be to protect the interests of banks.

“Banks have in the past few months been talking to various private equity (PE) players and a few large corporates in India and abroad, to partner with them in stressed companies,” said a senior bank executive with knowledge of these developments.

“Banks and such PEs (private equity players) or corporates would also pick up a part of the bad debt, which would be converted into equity.”

Banks and PE players would be solely focused on their interest in the loan and not the whole company, said bankers.

Currently, the minimum provisioning required for sub-standard loans, after these cross 91 days of non-servicing of interest, is 25 per cent.

After six months, the loans’ minimum provisioning can go up to 40 per cent and to 100 per cent in the fifth year, when these are written off.

Under the new scheme being worked out, the provisioning requirement at the start of the process could be revised down to 10-15 per cent and progressively increased at a rapid pace, said sources.

“Some people are exploiting the banking system’s inability to deal with consistent defaulters. That needs to be cracked,” said Finance Minister Arun Jaitley, delivering his speech as the chief guest at the Business Standard Annual Awards function in Mumbai on Saturday.

In the new system, the provision is likely to be reduced from 25 per cent to 10-15 per cent at the initial stage, when a joint lenders’ forum is formed. When the case moves to corporate debt restructuring (CDR), the provisioning requirement could be 15-25 per cent.

If an oversight mechanism is required for the loan, the provisioning could be at least 25 per cent.

If these instruments are unable to address the problem, the loan goes for strategic debt restructuring (SDR) and the scheme for sustainable structuring of stressed assets (S4A) stages, where the provisions would be quite steep.

Under SDR, banks convert a part of the souring loan into equity and take ownership of the company. The lenders can remove the promoter and install new management or use outside management consultants to turn around the company and find a buyer for the company.

Under S4A, banks divide the loan into sustainable and unsustainable parts and restructure the unsustainable portion. S4A can be invoked only when the sustainable part is at least 50 per cent of the unsustainable part.

According to sources, banks would largely act like PE firms interested in protecting and maximising their interest. An outside management consultant would be hired only to nurture the interest of the banks.

Existing promoters would continue to be in the business. The lenders would try and sell assets from the business to recover their dues. If they decide the company can turn around, banks would offer their share first to the existing promoters, said a person familiar with the matter.

Photograph: Vivek Prakash/Reuters