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Q. Scheme for Sustainable Structuring of Stressed Assets (S4A): Discuss how RBI’s new scheme for Sustainable Structuring of Stressed Assets will help banks resolve bad loans of large projects.
Jun 14, 2016 Related to : GS- Paper-3

Ans :


Recently the Reserve Bank of India has announced the Scheme for Sustainable Structuring of Stressed Assets (S4A) to help banks to resolve bad loans of huge projects. It will be an optional framework for resolution of large stressed accounts. It envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity or quasi-equity instruments which are expected to provide upside to the lenders when the borrower fails to repay.

Key features of S4A guidelines-

  • Portion of the debt can be converted into equity or other instruments under supervision of Indian Banks' Association's Overseeing Committee.
  • It will cover those projects which have started commercial operations and have an outstanding loan of over Rs 500 crore.
  • To ensure transparency, an Overseeing Committee, which will independently review the processes involved in preparation of the resolution plan.
  • Under the plan, the debt will be divided into two parts i.e A and B. Part A will include debt which can be serviced from the existing operation while remaining will be classified as Part B.
  • While there will be no extension of the repayment of Part A, the Part B will be converted into equity or redeemable cumulative optionally convertible preference shares.

How S4A will benefit banks?

  • The new restructuring scheme will help Indian banks in cleaning up large chunks of their bad loans, particularly to public sector banks, which amount to Rs 4.76 lakh crore. The new scheme will enable banks to recoup the loans converted into equity.
  • Now Bank can determine the amount of debt that it thinks a firm can service with its current cash flows (It should not be less than half of total debt). Once the sustainable level of debt has been determined, banks can convert the rest of the debt into equity or quasi-equity instruments.
  • Once the unsustainable debt is converted to equity, banks can sell this stake to a new owner who will have the advantage of getting to run the business with a more manageable debt.
  • It helps to restore the flow of credit to crucial sectors such as infrastructure and iron and steel etc and it reduces the stress of bad loans across banking system.


  • Guidelines allow only projects where commercial operations have commenced, hence many projects like power projects still under implementation, Banks not able to do much in such cases.
  • If current cash flows of company taken as basis to ascertain sustainable debt, then banks may run risk of accumulating too much unsustainable debt, which would then make the proposal unviable.
  • The guidelines do not allow for banks to change the terms and conditions of the loan. This would mean that not too much support to the sustainable part of the debt can be extended.


The New scheme S4A allows banks to convert up to half the loans held by corporate borrowers into equity or equity-like securities. As Indian banks are suffering from huge NPA’s, it will definitely strengthen the lenders' ability to deal with stressed assets and to put real assets back on track by providing an avenue for reworking the financial structure of entities facing genuine difficulties. In this direction it is welcome move.

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