A significant problem faced by Indian economy right now is the NPAs (non-performing assets) of PSBs (Public Sector Banks) as well as Private Sector Banks. India currently ranks fifth in the world among the list of countries with the highest level of NPAs and the first among BRICS.
What are Non-Performing Assets?
Loans given and investments (in government securities) are assets to a bank; loans being more significant. An asset becomes non-performing when they cease to generate profit. In the case of banks, a loan which is not being repaid becomes a bad or non-performing asset.
As per RBI norms, a loan becomes an NPA when the principal or interest is overdue for over 90 days. Overdue means the principal or interest payment has not made by the date fixed by the bank. The health of a bank depends on its management of distressed assets.
What are the different categories of Non-Performing Assets?
As per the RBI's 'Framework for Revitalising Distressed Assets in the Economy,' before the loan turns into an NPA, it is first categorized into three sub-categories. These are a part of Special Mention Account (SMA) category.
|SMA Sub-categories||Basis for classification|
|SMA-0||Principal or interest payment not overdue for more than 30 days|
|SMA-1||Principal or interest payment overdue between 31 and 60 days|
|SMA-2||Principal or interest payment overdue between 61 and 90 days|
An asset which carries no more than normal risk is known as a standard asset. After an asset becomes an NPA, they are categorized as Sub-standard, Doubtful and Loss.
An asset that has remained an NPA for a period less than or equal to 12 months. They are usually characterized by a possibility that the bank would sustain some loss if not corrected.
An asset that has remained sub-standard for 12 months. The collection or liquidation of these assets remains highly questionable.
A loan asset is such where the asset is identified as a 'loss' by the bank, an auditor or through RBI investigation. As per RBI's Circular dated July 1, 2013, 'such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.'
What is Strategic Debt Restructuring or SDR?
One of the many steps a bank can take to tackle NPAs is SDR. On June 8, 2015, RBI introduced the Strategic Debt Restructuring Scheme after it observed that in the restructuring of accounts, there were borrower companies that could not come out of stress despite substantial sacrifices made by the lending banks. The cause of this was pointed out to be operational or managerial inefficiencies.
Paragraph 5.3 of RBI's circular dated February 26, 2014, states that "the general principle of restructuring should be that the shareholders bear the first loss rather than the debt holders." So, to put it simply, banks can convert full or part of their loans into equity shares in the company it has lent the money to.
As mentioned above, there is a need for change in management, which means to say that the shares are transferred from the promoter to the banks. This allows the banks to take control of the management of the company.
What is its basic purpose?
SDR's basic purpose to ensure that promoters have more stake in reviving stressed accounts while providing banks with enhanced rights to change ownership where necessary and take control of accounts which fail to achieve critical milestones. This scheme cannot be used for other reasons.
How is it initiated?
It is Initiated by the Joint Lenders' Forum (JLF). This is a committee formed by all the bankers that have given the loan to the distressed company and are affected by it.
The RBI has a Central Repository of Information on Large Credits (CRILC) to collect, store, and disseminate credit data to lenders. Banks required to report to the CRILC when accounts of borrowers classified SMA have an aggregate fund based and non-fund based exposure of Rs. 50 million or above.
On reporting on assets under SMA-2, with an aggregate exposure of Rs. 1000 million or above, the banks are advised to form JLF. They can do so at the SMA 0 or SMA 1 level too.
All the lenders come together to make and sign an agreement called the JLF Agreement. The Indian Banks' Association (IBA) prepares the Master JLF Agreement.
What are the options under SDR Scheme?
As per RBI's notification dated June 8, 2015, the JLF can consider the following options:
- Possibility of transferring equity of the company by promoters to the lenders to compensate for their sacrifices;
- Promoters infusing more equity into their companies;
- Transfer of the promoters' holdings to a security trustee or an escrow arrangement till turnaround of the company. This will enable a change in management control, should lenders favor it.