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Q. Is S4A succeed: Is Scheme for Sustainable Structuring of Stressed Assets (S4A) succeeds in resolving distressed accounts? Discuss
Jul 15, 2016 Related to : GS Paper-3

Ans :

Introduction-

Recently RBI has launched a new scheme called ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’ for resolution of bad loans of large projects. The objective of S4A is to strengthen the lenders ability to deal with stressed assets and put real assets back on track by providing an avenue for reworking the financial structure of entities facing genuine difficulties. Hindustan Construction Company became first borrower to try this scheme.

Will it succeed?

  • The S4A envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around. This gives greater scope for banks to recover their dues.

  • The S4A essentially allows banks to restructure debt supervised by an independent committee, without having to take over the firm or dislodge its promoters, which was key constraint to the earlier Strategic Debt Restructuring (SDR).

  • By offering softer terms to banks and borrowers to aid easier resolution, S4A may succeed in rescuing firms hit by a cyclical downturn. It will helps bring down the bank’s stressed assets.

Constraints-

  • The S4A lays down specific conditions for banks to consider problem accounts for restructuring. The borrowers’ projects should be operational, their loans over ₹500 crore, and at least 50% of their dues serviceable. But the 50% serviceable debt condition will rule out many deeply distressed borrowers.

  • If borrowers meet these criteria, lenders can jointly agree to convert the unserviceable part of the debt into equity or preference shares. The promoter, in turn, must agree to share losses by giving up his equity and the firm repaying the residual debt, without a moratorium.

  • Half the lenders, the borrowing firm and the supervisory committee are all required to agree on the firm’s valuation, which will be based on elaborate rules laid down by the RBI. But then, micro-managing valuation may reduce the room for banks to cobble together a deal that is win-win for all constituents.

  • Though these rules look pragmatic, but these rules add constraints for firms teetering on the brink of bankruptcy or which have recalcitrant promoters. Hence banks may not make very big inroads into the recovery of banks stressed assets.

Suggestion-

Considering the various constraints RBI should introduce flexible mechanism in its S4A guidelines. For ex it should bring down threshold limit, so that S4A can cover most of the stressed assets.

Conclusion-

Indian banks, particularly those in the public sector, have been struggling with bad debts, rising provisioning for bad loans and weaker earnings. S4A will strengthen the lenders' ability to deal with stressed assets and would also put real assets back on track, benefitting both banks and the promoters of troubled entities. But considering the various constraints S4A may not make very big inroads into the bank massive hoard of doubtful loans. Hence, given the scale and diversity of bad loans, flexible resolution mechanisms are need of the hour to solve this problem.


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